Financial market implications of the Fed’s inertia

The FOMC’s decision to leave its target range for the federal funds rate unchanged has triggered a rally in government bonds and weakness in the dollar, which in turn has weighed on equities in the euro-zone and Japan. We don’t expect these trends to continue. Admittedly, we have scaled back the amount by which we forecast the FOMC to tighten policy through the end of 2016. But we still expect the US central bank to raise the federal funds rate by much more than generally anticipated.