Decisions by the Fed and the Bank of Japan on Wednesday helped reassure investors that major central banks weren’t imminently pulling back from easy-money policies. But the vote wasn’t unanimous. That’s one reason why we hear so many conflicting views from different Fed officials recently, and why their strategy revisions are so frequent.
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The Fed decision also lent pressure on the dollar, which retreated further yesterday against the euro and most other leading currencies. The last time there were three dissenters was in December 2014. US shoppers retreated in August to depress retail sales after four straight monthly gains. Raising rates now would actually make such a downturn more likely, so creating the ability to respond to a self-induced recession is not a good scenario.
The U.S. Federal Reserve is charged with the task of setting the country’s monetary policy.
Sentiment shifted, though, after Fed board member and Yellen ally Lael Brainard laid out the case for delaying a resumption of rate increases for now. It was the first time it has used that wording since late previous year, when it most recently raised rates.
“The looser for longer message from the Fed and the lowering of the median point of rate rise projections is seen as a plus for risk assets, as can been seen in global equities”, said fund manager GAM’s head of multi-asset portfolios, Larry Hatheway.
In her news conference, Yellen offered a simple explanation for why the Fed didn’t raise rates: The economy can still grow without hurting itself.
Sterling briefly slipped below the psychological £1.3000 handle, paring back all of yesterday’s gains, while traders fear further jawboning comments by Japanese officials to underpin the Dollars. “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.
If the Fed hikes rates, USD will soar and finally cause USD/JPY to gain in value.
Analysts said the Fed nevertheless left open the possibility of not taking any rate action before 2017.
If Fed officials are right, they will have been at zero or below on their real policy rate for about a decade, and that means whatever is slowing US growth is more like a persistent anchor than a passing headwind.
Kate Warne, investment strategist at Edward Jones was surprised at the number of dissents.
The Federal Open Market Committee (FOMC) made a decision to “maintain the target range for the federal funds rate at 1/4 to 1/2 per cent” and wait until it sees more evidence of continued progress towards the Committee’s goals, the Fed said.
The consensus among economists is for a hike in December as the Fed’s November meeting comes right around the U.S. Presidential elections.
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After announcing that The Fed is going to sit on interest rates for the time being – a decision that shocked more than a few investors and apparently nearly killed Bill Gross – Yellen went about her usual dry recitation of economic data to justify her decision and then answered questions from journalists.
