European stock markets dropped half a percent in early trade, but global share indices were still near 13-month highs, helped by the assumption after a statement on Wednesday that the Federal Reserve, at worst, would raise interest rates only gradually over the next two years. The central bank said the argument for raising rates has “strengthened” recently.
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This means the Fed has raised rates only once – by a mere 0.25 percentage points last December – over the past decade.
The FOMC’s summary of economic projections released alongside the post-meeting statement said the committee still anticipates one rate increase in 2016, which will be expected at the FOMC’s final meeting of the year in December.
In a press conference after the meeting, Fed chair Janet Yellen said policy was in support of “statutory goals for maximum employment and price stability”, and that the Fed expected the economy to expand “at a moderate pace for the next few years”. Yellen said that although the economy continues to grow moderately, there is no evidence that it is overheating, and recent developments show the economy has “little more room to run” than previously thought.
Yellen agreed that the case for an increase in rates was stronger, but that not only was the economy not “overheating” now, but there was actually a “little more room to run”.
The committee noted that inflation still has not risen to the Fed’s 2 percent target. “I think it more represents a softening stance towards banks and other financial institutions likely due to concerns and backlash over profitability and financial stability”, Yeo said.
In the years ahead, the committee sees two hikes in 2017 and three each in 2018 and 2019 that would bring the funds rate to about 2.625 percent, assuming that each increase would come in quarter-point increments. Officials are now projecting a move to a 0.65 percent rate this year, up from a current level of 0.4 percent. While we do not believe that the curve will steepen dramatically, it could be possible that USA interest rates rise in more or less parallel shifts as the Fed continues to hike rates, maintaining the shape of the curve. So many dissents at one meeting are rare historically.
In corporate news, shipping company Moeller-Maersk traded higher after announcing it will split into two separate units.
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In late trading, benchmark 10-year Treasury notes were up 9/32 in price for a yield of 1.655 percent, down 3 basis points from Tuesday. Homebuilders had slumped Tuesday after the US government said construction of new homes slowed down in August. The eurozone economy is growing slowly, but inflation remains well far below the ECB’s 2 percent annual target. While the closest we’ve come in the current cycle is approximately +0.75%, markets are now repricing the impact of global central bank policies.
