World shares and bonds rallied on Thursday, after the Federal Reserve left USA interest rates unchanged and slowed the pace of future hikes, weakening the dollar and lifting commodity prices.
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In the bond market, benchmark United States yields hit near two-week lows on revived bets the Fed would raise interest rates slowly due to weak economic growth and inflation stuck below its two per cent goal.
Indeed, the committee said that near-term risks to the economic outlook “appear roughly balanced”, which is more-or-less the same sort of lingo the Fed used in 2015, before hiking rates toward the end of the year. “Financial conditions have eased over the course of the year, partly on the back of a weaker dollar and lower bond yields, and now at more accommodating levels than a year ago, lowering the bar for a December hike”.
The case for a rate hike had strengthened and economic risks were balanced, but the FOMC had chose to wait for the time being and wait for evidence that there had been further progress in meeting their objectives.
Many economists disagree with the Fed’s decision. Officials indicated they foresee one rate hike before the end of 2016.
Steady job gains have pulled discouraged workers back into the job market and yet inflation remains below the Fed’s two percent target rate.
Indeed, the Fed made clear in updated forecasts it issued Wednesday that it expects growth to remain tepid for the next three years.
The BoJ is launching a new kind of easing, setting a cap on 10-year bond yields at 0% and promising to purposely continue buying assets so as to overshoot its 2% inflation target as it looks to defy market expectations.
The Fed also projected a less aggressive rise in interest rates next year and in 2018, and cut its longer-run interest rate forecast to 2.9% from 3%.
The statement commented that the labour market had improved further and consumer spending was firm, while investment levels remained disappointing.
In addition to the Fed’s low-interest-rate policy, an increasing number of global central banks are toying with negative interest rates. “This despite Janet Yellen calling the November meeting live but, coming as it does only a week before the Presidential elections, we are unlikely to see a rate hike at that time”.
Yellen said the differences inside the FOMC mainly came down to the timing of rate increases, not to whether they should be carried out.
Asian shares rose, with MSCI’s broadest index of Asia-Pacific shares outside Japan up 1.2%.
The US Federal Reserve voted 7-3 in favour of holding rates last night, despite policymakers finding the case for a rate hike had strengthened in recent months.
“The change in expectations over the period have had a dramatic impact on risky assets and on the USA dollar”.
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Higher interest rates in a country increase the value of that country’s currency as compared to countries offering lower interest rates.
