The Federal Reserve lifted interest rates to <0.50% in December last year. And, for the second time this year, rates have remained unchanged. It was not unexpected; analysts knew the Fed’s statements would carry more gravity than its eventual decision.
The Fed revealed their views on recent economic activity in a press release at around 2:00am AEST. Here is a summary of that press release:
Since January, economic activity has been expanding at a moderate pace. Despite the global developments of recent months, the Fed does not believe a cut in March was necessary.
Household spending was increasing at a moderate rate, with the sector showing signs of improvement. Business fixed investments, along with net exports, were weakening. But there were a range of indicators suggesting the jobs market was picking up.
Even though inflation picked up it was still below the Fed’s target of 2%. Yet the direction of the Fed’s rate policy will depend on future economic data.
It’s expected that the Fed will hike rates on two separate occasions this year. The targeted median rate for the end of 2016 is 0.9%. The Fed has also lowered its rate forecasts for the next two years. The target rate is now 1.9% by the end of 2017, and 3% by the end of 2018.
This all sounds positive for both the US and global economy. Yet there are still fears surrounding global economic conditions. The financial market development continues to pose a risk. But the head of the Fed, Janet Yellen, said ‘risks to the downside appear to be diminished’.
Some analysts completely disagree with Yellen. They believe the Fed has tricked itself into thinking the economy is stronger than it actually is. They may have a point. If we look at the Fed’s outlook in December and compare it to today, not much has changed.
In December, the Fed said it thought the short term rate that was set would reach 3.3% by 2018. And, as I stated before, the Fed is now targeting 3% for 2018. So realistically it doesn’t seem like the Fed has changed their outlook at all.
Source: Federal Reserve
The Fed’s statements were interpreted as dovish; meaning a loosening of the monetary policy. The US dollar was sent to its lowest point in a month. And all three US major indexes ended their sessions positive.
As you would expect, the AUD shot up. The dollar went from US$0.743 to US$0.756 on the Fed’s statements. The positive trading out of the US has also put upwards pressure on Aussie markets today. Rises in iron ore and oil also helped boost sentiment.
Delaying a rate hike could actually drive more investment to Australia. We have a cash rate of 2%, which is quite high for developed countries. This could lead to more yield hunters buying up Australian government bonds in the future.
Hopefully the Fed is correct, and the wider economy does pick up. But, right now, analysts aren’t betting on it.
Junior Analyst, Money Morning
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