Central Banks

FOMC leaves interest rates on hold

  • Virtually every economist was expecting no change
  • The Fed funds futures market was pricing in a 4.5% chance of a hike
  • Unanimous vote

Statement highlights:

  • Repeats that economy has been growing at ‘moderate’ rate
  • Says risks remain roughly balanced
  • Omits line saying the committee is monitoring inflation developments closely
  • Repeats that job gains have been strong
  • Repeats that growth of household spending moderated from Q4
  • Says inflation ex food and energy has moved close to 2% vs ‘run below 2%’ previously
  • Prior: Inflation on a 12-month basis is expected
    to move up in coming months. Now ‘Inflation on a 12-month basis is expected to run near the Committee’s symmetric 2 percent objective over the medium term’
  • Omitted line saying “the economic outlook has
    strengthened in recent months.”

The Fed added a nod to it symmetric 2% inflation target with this line: “Inflation on a 12-month basis is expected to run near the Committee’s symmetric 2 percent objective over the medium term.” That previously didn’t contain the word ‘symmetric’. One take is that it could be a nod to allowing inflation to run slightly above 2%.

The omission of the line on monitoring inflation developments closely is interesting but tough to make sense of. They had been worried about some downside risks, now maybe they’re more confident that it will rise. That’s hawkish but it’s certainly not the way the market is moving on the knee-jerk.

The biggest news to me is the removal of the line saying the outlook had strengthened. It’s a nod to some of the poor data and a bit cautionary.

The US dollar is lower by around 25 pips across the board on the headlines.

Bottom line: You have more confidence on rising inflation but there are slight worries about the economy and a subtle hint the Fed could tolerate above-target inflation.

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