Fed Hold Sends Shockwaves Through Markets as BOJ Struggles to Defend Yen

The Federal Reserve held interest rates at 3.50% to 3.75%, as expected, but the decision still sent shockwaves through markets.

The nine-to-three vote with three dissenting members, who voted for a quarter-point hike, was the closest call in years. Futures had priced in a 36% chance of a hike before the meeting, and the two-year Treasury yield fell by about four basis points, while the thirty-year rose more than nine.

The decision essentially dated the September rate hike rather than canceling it, which is why investors are still pricing in an 80% chance of a hike this month.

In contrast, the Bank of Japan has been trying to defend its currency against the rising US dollar, but so far, it hasn't had much success. The Japanese real policy rate is negative on every measure, and the country's underlying inflation is near 2.8%.