Despite greater uncertainty about the near-term outlook, the two hikes we expect this year will still support United States dollars outperformance within G10 (except versus the Japanese yen) with many other countries easing policy further, most notably the European Central Bank. Bonds sold off and rates continued to rise, with the yield on the 10-year Treasury pushing back to 2%. However, the market consensus still shows Fed may forecast at least two to three rate hikes at the end of this week’s review. A lot of the headwinds that spooked the Fed this year – such as market turbulence, recession fears, volatility in credit markets and the oil price crash – have abated, giving the Fed more confidence to continue its hiking cycle.
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In December, the Fed raised the federal funds rate for the first time in nine years and stated shortly after that they would raise rates four more times in 2016.
At the next meeting in January, amid market turmoil and increased concerns over a global growth slowdown, the committee dropped the reference to “balanced” risks from the statement altogether, in favor of language that said it was “closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook”.
“Given the rather gradual return of inflation towards the 2 percent [target], we believe the Fed will want to wait until September before raising rates”, researchers at Oxford Economics wrote in a research note Wednesday. There was a downgrade to growth and inflation and a slowing in the expected rise in rates. Fed, in its December meet, had indicated upto four hike in 2016.
A day after the Fed announced it’s keeping interest rates unchanged, a decision that was in line with expectations, stock prices moved slightly lower early Thursday. The sentiment is turning increasingly bearish towards the USD and with inflation forecasts trimmed to 1.2% from 1.6%; the Dollar may be left vulnerable and open to more losses moving forward.
Bryce Doty, portfolio manager at Sit Rising Rate ETF, said the Fed has backed itself into a corner trying to effectively telegraph its intentions on monetary policy. Nonetheless, the API US oil inventories number only grew by 1.5 million barrels last week, and if a similar number were seen in this evening’s Department of Energy it could be very bullish for the oil price. “The best course of action in this situation is to leave rate hikes on the table at the next couple of meetings”. Nine-year high gains in construction of single-family houses were main reason behind the gain.
However, Ellenberger acknowledges the recent strength seen in the USA economy, particularly in the labor market. No, Chair Yellen didn’t say that, but that is what I took from the answer. Over the last 12 months, the all items index increased 1 percent before seasonal adjustment.
Recent comments from Fed officials indicate that they differ on how to interpret inflation prospects.
What is most surprising is the Fed’s very low expectations for the path of inflation.
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“Nothing needs to improve in the economy”, he said.
