“The last thing on earth that they want to do is a rate hike that isn’t anticipated”. No change in interest rates is expected but the wording of the FOMC’s statement may hint at the possible timing of its next rate hike. Esther George, head of the Federal Reserve Bank of Kansas City, again dissented because she wanted to raise rates by about a quarter of a point.
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July 25 (BusinessDesk) – The New Zealand dollar dipped as investors prepare for the Federal Reserve’s policy review this week and will be looking for signs the world’s biggest central bank will raise interest rates later this year.
“The simple answer is that via a mix of over communication, excessive short-term data dependence, and, considerable market dependence (akin to the Greenspan put) they have shunted market expectations one way and then the other to the point where the Fed can not right size market expectations quickly enough to hike rates, without doing even more damage to their credibility”, Ruskin said. While Chair Janet Yellen has repeatedly stated that the Fed is likely to raise interest rates gradually, market volatility and the unexpected dip in job gains have delayed such plans.
But financial markets have bounced back, with major US stock indexes hitting record highs last week. “If they start thinking about continued global uncertainty, Brexit fallout, a drag from net exports, then maybe September is less likely”, he speculated.
Another key reason why the Fed held off on a rate hike in June was concern about the health of the labor market. The central bank was also affected by Britain’s forthcoming vote on whether to leave the European Union, anticipation of which had rattled investors.
The statement contrasted June’s jobs report with “weak growth in May”. It has since regained all those losses – and set new highs.
“That is consistent with the improving economic situation, particularly the strong employment data for June, and there are also sighs that inflation is starting to pick up as well”. In the spring, consumers boosted spending at the fastest pace in a decade. The job market has rebounded from a sharp slowdown in hiring in May, though the Fed noted that business investment was soft and inflation remained below its target.
Now, the consensus on Wall Street is that the Fed won’t hike rates until at least December, if not 2017.
“Information received since the Fed policy committee met in June indicates that the labor market strengthened and that economic activity has been expanding at a moderate rate”, the Fed said. In May, job gains plummeted to an initially reported 38,000, since revised down to just 11,000. It added that household spending also had been “growing strongly”, and pointed to an increase in labor utilization.
For San Francisco Fed president John Williams, one of the 17 members participating in the central bank’s rate-setting deliberations, all that is needed is a bit more confidence that inflation is indeed headed towards the Fed’s 2% target. This is the lowest mortgage rate most home borrowers have ever seen in their lifetimes. “The minutes not being entirely in accord with the statement”, Paul Mortimer-Lee, global head of market economics at BNP Paribas explained.
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The decision to hold rates steady was widely expected. The S&P 500 Financial Select Sector index (XLF) has gained 1.5% since June 24; however, the index has tumbled 1.6% YTD. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. A policy statement to be published on Wednesday in Washington will probably acknowledge better news on the economy, but fall short of telegraphing that a hike is imminent.
