Signalling slower and fewer rate increases at its policy meeting on Wednesday, the Fed left investors feeling that any tightening would be glacial at best.
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Investors were also eagerly awaiting the latest Fed policy statement at 1400 EST in Washington (1800 GMT). Markets across all asset classes are certainly pricing in the latter and this may well be the outcome, but risk/reward makes it very unsafe to assume that interest rates will be left on hold.
Fed has been paying attention to the dollar strength and resulting weakness in manufacturing, but one month’s weak manufacturing PMI we believe won’t significantly affect the Fed’s decision.
Expectations of a rate increase have all but evaporated, but investors will comb the US central bank’s statement for clues about whether it will hike in coming months. “Global concerns such as China’s wobbling economy and the continued uncertainty from Brexit no doubt played a role in the Fed’s thinking, as well”.
The Fed aims for 2 percent inflation as a buffer against deflation, a harmful decline in prices and wages.
Even if their decision was not partisan, such sophisticated monetary wonks would recognize that disrupting markets in the month before presidential elections could be seen as active interference in the political process.
Here’s the new dot plot, along with June’s projections. The report cites low energy prices as the major cause of low inflation, which the Fed expects to continue in the short run; over the medium-term, officials expect inflation to reach its 2 percent target.
Stock prices rose in the hour after the Fed issued its statement and during a news conference by Chair Janet Yellen that laid out her case for holding off on a rate hike for now. Financial markets are also pricing in a relatively low probability of a hike today with Fed-Fund futures implying a 15% chance.
On Wednesday, Kansas City Fed president Esther George, Cleveland Fed president Loretta Mester and Boston Fed president Eric Rosengren dissented on the policy statement, saying they favoured raising rates this week.
Three FOMC members thought the Fed should have raised rates at this meeting. Although it kept interest rates unchanged, the Japanese central bank said it would switch from bond-buying to targeting long-term interest rates.
Some experts supported the Fed’s decision, arguing that there are more risks to raising rates too soon rather than too late. But in March, the Fed scaled back that forecast to just two increases this year.
The Fed said in a statement ending its latest policy meeting Wednesday that the US job market has continued to strengthen and economic activity has picked up.
Still, analysts hope to glean additional insights into Yellen’s thinking regarding the economy’s sluggish growth and last month’s downshift in hiring. The eurozone economy is growing slowly, but inflation remains well far below the ECB’s 2 percent annual target. The Dow Jones Industrial Average added 163.74 points, or 0.9%, to 18293.70. The Standard & Poor’s 500 index picked up 19 points, or 0.9 percent, to 2,159.
ASIA’S DAY: The Shanghai Composite Index rose 0.5 percent to 3,042.31 and Hong Kong’s Hang Seng added 0.3 percent to 23,748.61.
Japan’s central bank opted Wednesday to keep its policies mostly unchanged, with some technical adjustments to how it controls interest rates.
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Barclays outperformed, rising 3.1 percent after HSBC analysts upgraded the bank to “buy” from “neutral”.
