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 Thursday 16 June 2016

PM Bulletin: FOMC post-mortem

 

 

At 19:00 BST yesterday the US Federal Reserve released its latest rate statement, updated its Summary of Economic Projections and kept its headline Fed Funds rate unchanged in a range of 0.50% and below. In the immediate aftermath the dollar fell sharply while precious metals flew higher. The major US stock indices also made modest gains.
  
The consensus expectation was met in that the Fed kept interest rates unchanged. Back in May various Fed officials had declared in speeches and TV appearances that a summer rate hike was a distinct possibility. Many went to great pains to inform investors that the markets had got it wrong in assigning a near-zero likelihood for a rate hike in either June or July. This led to a sharp about-turn from investors as they were forced to reprice markets to take account of these comments from Fed members.
  
Note that the Fed brought July into focus. In normal circumstances this month wouldn’t be top of anyone’s list as a setting for a change in US monetary policy. After all, what can be done in the minor July meeting that can’t be done in the more significant June meeting? The latter is altogether the better forum as it brings an update on the Fed’s Summary of Economic Projections together with a press conference from the Federal Reserve Chairman.
  
 Nevertheless, the Fed’s attempts to keep the June meeting alive floundered somewhat as markets woke up to the possibility of the UK voting to leave the EU in the referendum the following week. This meant July was firmly in the frame for a rate hike. This expectation was even kept alive to some extent following the disastrous Non-Farm Payroll release earlier this month. However, the chances of the Fed tightening monetary policy at next month’s meeting got slammed last night.
  
The Fed statement and economic projections were viewed as being far more dovish than expected. GDP forecasts were lowered slightly while the central bank noted that the market inflation expectations had declined. But most importantly Fed participants anticipating just one rate hike for the rest of this year went up to six from one in March. This was significant, even if the median call remains at two for 2016.
  
One analyst summed up the view of many saying this is as dovish as the Fed could be without actually cutting rates. In fact, the chances of a July hike have evaporated while the possibility of a cut has risen. On top of this, Janet Yellen’s subsequent press conference was viewed as a mess. As one commentator put it, the Fed tried to lead the markets, now the markets are leading the Fed. 
  
The bottom line is that the outlook for US economic growth is so poor that the Fed probably can’t risk a rate hike this year, let alone next month. No wonder equities are selling off.
  
One analyst summed up the view of many saying this is as dovish as the Fed could be without actually cutting rates.
   
Disclaimer:
   
Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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