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FOMC look-ahead (and Japanese stimulus talk)

We have two important central bank meetings this week. The US Federal Reserve concludes its two-day meeting tomorrow evening while the Bank of Japan (BOJ) ends its own two-day meeting early on Friday morning.

On the face of it the BOJ meeting is the more significant. This is because the consensus expectation is that the Fed will keep rates unchanged while the Japanese central bank is preparing to unleash a fresh round of monetary stimulus. If so, this would be the first time the BOJ has loosened monetary policy since it adopted negative interest rates at the end of January this year. I’ll be writing about this in more detail in Thursday’s PM report, but it is worth noting today’s rally in the yen. The currency shot higher this morning after the Nikkei Business Daily reported that the government was preparing to inject 6 trillion yen ($57 billion) into the economy over the next few years. If so, then recent speculation over the size of the government’s proposed fiscal stimulus will prove wide of the mark. Remember that after the ruling Liberal Democratic Party won a sweeping electoral victory in the upper house, Prime Minister Shinzo Abe suggested that 10 trillion yen ($95 billion) was earmarked for infrastructure projects. Then there were whispers that this could go as high as 20 trillion yen ($190 billion). Now investors are downgrading their expectations for fiscal stimulus. In addition, they’re factoring in the possibility that the BOJ may come up short on monetary stimulus as well.

But a more immediate concern is tomorrow’s Fed meeting. The central bank releases its FOMC statement at 19:00 BST and is widely expected to keep rates on hold. Speculation has grown recently that the Fed is once again becoming more hawkish following a recent uptick in US economic data releases. In fact some commentators are suggesting that the latest payroll and inflation numbers, together with strength in equity and bond markets make it irresponsible of the Fed not to hike rates now. But equally, Fed members could point to other factors which suggest that a delay is sensible. After all, there’s the added uncertainty surrounding the UK’s Brexit vote and how it may affect the economic outlook for both the Euro zone and UK. Additionally, the Fed may be unwilling to increase rates so close to the US Presidential Election for fear of destabilising financial markets ahead of such a crucial political event. Finally, the US dollar is trending higher which means (because of the peg) the Chinese yuan is as well. A rate hike now would exacerbate this situation and open the door for a Chinese currency devaluation. 

The consensus expectation is that the Fed will keep rates unchanged tomorrow. However, once again the accompanying FOMC statement will be carefully parsed for clues on the Fed’s thinking. It could be that the FOMC cranks up a hawkish bias and hints that it is preparing to raise rates at its next meeting in September. This should be dollar-positive in the short-term. But any rally could fade quickly as investors look ahead to a full two months without any danger of tighter US monetary policy.

David: On the face of it the BOJ meeting is the more significant.

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Posted by David Morrison

Category: PM Bulletin


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