The Daily Update - FOMC

Last night the Federal Open Market Committee (FOMC) reaffirmed their historical low target for the federal funds rate. They cited short term inflation concerns, which have persisted below their longer-run objective, and are expected to remain subdued in the coming months as the result of recent global economic pressures and uncertainties. Improving labour market conditions no longer seem to be a constraining factor with “solid” jobs gains, averaging 220,000 per month over the past three months, and unemployment declining. But the statement is clear that the FOMC wish, and also expect, to see this trend continue as well as inflation picking up before their initial increase.

US Treasuries rallied over a point since the announcement but there were no signs of overreaction as expectations prior to the release were fitting with the overall tone of the FOMC statement; fairly balanced and almost evenly split. The statement’s language affirmed the market’s inconclusiveness saying, “The recovery from the Great Recession has advanced sufficiently far, and domestic spending appears sufficiently robust, that an argument can be made for a rise in interest rates at this time. We discussed this possibility at our meeting. However, in light of the heightened uncertainties abroad and a slightly softer expected path for inflation, the Committee judged it appropriate to wait for more evidence, including some further improvement in the labour market, to bolster its confidence that inflation will rise to 2 percent in the medium term. Now, I do not want to overplay the implications of these recent developments, which have not fundamentally altered our outlook. The economy has been performing well, and we expect it to continue to do so.”

Yellen also reiterated to markets that, “The importance of the initial increase should not be overstated: The stance of monetary policy will likely remain highly accommodative for quite some time after the initial increase in the federal funds rate in order to support continued progress toward our objectives of maximum employment and 2 percent inflation.” The median of the committee members’ independent projections continues to forecast rates around 1.5%, 2.5%, and 3.5% by late 2016, 2017 and 2018 respectively.

Markets still have October and December meetings on the cards for a 0.25% rate increase, in line with the majority of FOMC predictions, but overall market consensus seems to be shifting into early 2016. Some pundits have excluded the next October meeting as a potential date for a change in rates as there is no scheduled press briefing until the meeting in December - as such a move could be too precarious to enact without Fed Chair Janet Yellen dulling market concerns. However, Yellen confirmed that all FOMC meetings are viable as they would call a press conference should the data warrant a rate rise by the October meeting. Overall the market is signalling a low 14% chance of a rise before the December meeting; probably over concerns that the effects global economic constraints have yet to fully impact the US economy and levels of inflation. Our global growth and inflation models continue show similar concerns supporting the argument for a positioning in high credit quality sovereign and corporate bonds.

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