“Markets had been slowly pricing in a higher likelihood of a rate hike by the year-end and have returned to pre-Brexit expectations in recent day, Rob Carnell, chief financial economist at ING, told The Financial Times”. “The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation”. “In the USA, U.K., Eurozone, China, Japan, and Canada-they’re all showing a decisive turn up in core inflation”, Paulsen says. Non-farm payrolls rose by 287,000 jobs in June, dispelling some concern that hiring had slowed, after May’s gain of 11,000. Kansas City Federal Reserve President Esther George voted against the action, citing a preference for a 25 basis point increase.
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U.S. Federal Reserve on Wednesday kept federal funds rate unchanged, reiterating that it continues to closely monitor inflation indicators and global economic and financial developments. Near-term risks to the economic outlook have diminished. “They are unlikely to raise rates in September with the US Presidential elections due later this year”.
In its statement Wednesday, the central bank underlined strengthening labor market conditions, modest expansion in economic activity, and strong growth in household spending, which carried a more upbeat view of the us economy than previous statements.
The US central bank indicated less worry about possible shocks that could push the US economy off course and noted that inflation expectations were little changed in recent months.
All that strength might argue for September rate hike, especially if monthly job growth equals as least 200,000 between now and then.
The Fed’s comments saw Wall Street ended lower – except for Nasdaq which closed at yet another 2016 high as investors chased Apple shares higher in the wake of its solid (but lower) quarterly figures. But when the Federal Reserve ends its latest policy meeting Wednesday, most analysts think it will signal that it wants to see further gains before raising interest rates again.
However, there is still much to be watched in the economy and financial markets between now and September that could be perceived as risks by the Fed. The Fed might raise rates in September on the back of very solid macro data, yet, given the renewed decline in commodities and the capital build-up in haven assets, this isn’t a particularly viable perspective.
The S&P 500 recently traded at about 17.2 times expected earnings, up from about 16.5 at the start of the year, according to Thomson Reuters Datastream. “After all, without business investment, job creation and by extension income growth and consumer spending will remain restrained”.
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The Fed’s preferred inflation rate now stands at 1.6 percent and has been below target for more than four years.
