US Fed holds rates but signals hike could come later this year

Big miners helped FTSE 100 higher at the open after the US Fed kicked the interest rate can further down the road yesterday.

Sterling is now 0.4 per cent higher against the dollar at $1.307, but flat against the euro at €1.165. As a result, officials believe the natural interest rate – the inflation-adjusted interest rate at which inflation and employment stabilize – will remain lower than it has been in the past.

Turkey is expected to cut its interest rates again later.

At its two-day meeting which ended on Wednesday, the US central bank held its target range on short-term rates unchanged at 0.25 percent to 0.50 percent, leaving the door open for a possible rate increase in December.

U.S. stocks looked set for another day of gains on Thursday a day after the Federal Reserve made a decision to stand pat on rates but suggested a hike would come later this year.

Citi assumes a slower pace of U.S. interest rate “normalization”. In our view, the BOJ needed to minimize market shock accompanying a shift in policy targets and also make the easing system longer-lasting and more sustainable.

Its stance underscored the lack of urgency the USA central bank’s leadership feels about lifting rates when inflation is lingering below its 2% goal and the unemployment rate is holding steady at a low level just under 5%.

The Mail, meanwhile, runs with the acquisition of Bernard Matthews by the owner of the 2 Sisters Food Group in a deal that will safeguard 2,000 jobs.

Due to the Fed disappointing markets, investors looked towards higher-yielding, risk-correlated assets in order to make profits while the United States economy continued its slow and steady growth.

“We judged that the case for an increase had strengthened but decided for the time being to wait for continued progress toward our objectives, ” Ms. Yellen said in her press conference following the meeting.

If the Bank of Japan is going to keep 10-year yields at zero percent, then any issuance by the government of that duration would come at zero cost, and likely be swallowed substantially by continuing central bank buying – adding up to direct financing of the budget that has been speculated for months.

As oil is Canada’s most lucrative commodity export, the oil-correlated Canadian Dollar benefitted from this, as well a surprising decline in United States oil inventories. The Fed had previously indicated it would hike United States interest rates up by at least 50 basis points in 2016, but now it appeared that only 25 basis points were possible. Economic growth and inflation likewise would grow more slowly. When the Fed does eventually act, if it turns out that the move is “late”, the central bank can always catch up by lifting rates by larger amounts or more frequently in the future.

The consensus among economists is for a hike in December as the Fed’s November meeting comes right around the US Presidential elections.

The FOMC left interest rates unchanged as expected, but signalled that one increase in the Fed funds rate was likely by December.

All of this means that the risks of waiting a little bit longer to raise interest rates are low.