Major North American stock markets enjoyed a bounce Wednesday as the U.S. Federal Reserve announced it was keeping its key interest rate unchanged. This is similar to what the Central Bank of Nigeria did Tuesday, when it was widely expected that the bank would reduce rates in line with the expectation of the finance ministry.
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At its recently concluded meeting, the US Federal Open Market Committee (FOMC) made a decision to keep its key interest rate unchanged although it had clear signals it was ready to bring back rates to “normal” levels after the accommodative measures in recent years.
“The highly-unusual 7-3 FOMC vote speaks to the complexity facing the Fed operating in a prolonged period of highly unbalanced policy mix”, Allianz’s Mohamed El-Erian said. But added, “the case for an increase in the federal funds rate has strengthened”. However, a few analysts had anticipated a rate hike.
The Fed’s cautious, yet generally positive, economic statement follows a slew of mixed data in August, including weak retail sales, soft ISM manufacturing and services readings, and slower-than-expected hiring.
“We expect the Committee to pull the trigger on rates later this year, assuming that global markets don’t convulse and USA data cooperates, with inflation metrics particularly in focus”, added TD Economics. Real GDP is now estimated to have increased only 1.1% in the second quarter.
The Fed said in a statement following its latest policy meeting Wednesday that the US job market has continued to strengthen and economic activity has picked up.
Meanwhile, inflation, which has run below the Fed’s 2% target for years, has started to show signs of improvement.
US benchmark 10-year Treasury notes rose 9/32 in price, yielding 1.637 percent, down 4 basis points from Wednesday.
While Tokyo is on holiday on Thursday, stocks .N225 closed up 1.9 percent on Wednesday after the BOJ’s shift to targeting a positive yield curve, a move that was considered bullish for banks, insurers and pension funds. However, the Fed sees inflation remaining “low in the near term”. What the latter is suggesting, however, is that a huge majority is expecting a 2016 hike since 17 officials submitted forecasts.
It projects one rate hike this year (in December) and two in 2017.
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While the Fed said the risks to economic outlook were roughly “balanced”, it left rates unchanged for want of “further evidence of continued progress”. However, for 2018 and 2019, Citi forecasts only two hikes a year (June and December), which would leave the federal funds rate at 1¾ and 2¼ percent by end-2018 and end-2019, respectively.
