Last night the US Federal Reserve held interest rates at near zero, with comments from chairman Janet Yellen pointing to worries over economic growth, low inflation and global turmoil. She also said that downward pressure on inflation from lower oil prices and the strong dollar are “transitory”, and the bank expects inflation “to move back to 2%”.
1) An nearly unbelievably pessimistic outlook for USA growth and inflation in yesterday’s Fed statement of economic projections. Tighter monetary policy can also boost the dollar, which tends to weigh on commodities priced in the USA unit because it makes them more expensive to users of other currencies.
And after a wild swing on Thursday that saw stocks ultimately end the day lower, they opened in the red on Friday morning. The benchmark USA rate was down $1.38 at $45.52 a barrel while Brent crude, the main contract for worldwide oils, rose 68 cents at $48.40. “As the Fed has held firm on rates, we anticipate that sterling may come under renewed focus and the market may turn its attention towards the Bank of England and the possibility of a United Kingdom rate hike“.
“We see a Fed which knows the labor market is tightening but can’t yet bring itself to overlook its (excessive) fears about the global outlook”.
France’s CAC 40 slipped 1.3 percent in early trading to 4,594.96 and Germany’s DAX fell 1 percent to 10,128.95.
“The timing will depend on developments in financial conditions and economic data, but we believe an October rate hike is unlikely and the December meeting is a toss-up”.
On the other hand, the Fed has made it clear that the current policy of low rates is an unusual measure meant to shore up the economy and will eventually be dismantled. “But volatility is likely to remain high as markets, like the Fed, will still have to confirm the US economy is withstanding the adverse impact from the global economy”, said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management. And the Fed wants the first rate hike to be as “unexciting” as possible. Some analysts say there’s a good chance the hike won’t occur until 2016. Lacker, president of the Fed’s Atlanta regional bank, had pushed for the Fed to begin raising rates by moving the federal funds rate up by a quarter-point. The Fed’s forecast still foresees inflation accelerating to a 1.7 percent increase next year, still below its 2 percent target.