The US Federal Reserve delivered no surprises today as it kept its benchmark interest rate unchanged at the end of its two-day policy meeting. As expected, the Federal Open Market Committee (FOMC) kept the federal funds rate unchanged at between 0.25%-0.50% for the fourth straight month.
Market expectations of a rate hike in June had risen sharply after the release of the April meeting minutes in mid-May, which were surprisingly hawkish. However, expectations were pared back drastically after hugely disappointing non-farm payrolls numbers for May, which pointed to a slowing jobs market. The focus then shifted as to whether the Fed would signal a possible move in July if jobs growth rebounded. But the Fed disappointed markets as it left no clues of a possible rate hike in July or in the coming months in its statement today.
Speaking in the press conference after the FOMC announcement, Fed Chair Janet Yellen told reporters that the economic outlook is “inherently uncertain” and tried not to draw too much emphasis from the Fed’s latest economic projections.
In its June projections, the Fed downgraded the GDP growth forecast for 2016 from 2.2% to 2.0%, and for 2017 from 2.1% to 2.0%. The forecasts for unemployment were left unchanged but inflation projections were revised slightly higher. The Fed expects inflation according to the PCE measure to average 1.4% in 2016, compared with 1.2% in the March forecasts. Core inflation was also revised up, from 1.6% to 1.7% in 2016, and from 1.8% to 1.9% in 2017.
The more closely watched rate projections were revised lower for 2017 and 2018 but left unchanged for 2016. The Fed still expects to raise rates twice in 2016, with a median forecast of 0.9%. However, the median forecasts for 2017 and 2018 were revised lower to 1.6% (from 1.9%) and 2.4% (from 3.0%) respectively.
Yellen stressed that the neutral rate of the fed funds rate that is consistent with full employment is “quite depressed” by historical standards as she justified why the longer run forecast for the fed funds rate was revised down from 3.3% to 3.0% even though the longer run GDP growth forecast was unrevised at 2.0%.
This could be a sign that the rate rise cycle may be even more gradual than anticipated, especially given the ongoing headwinds facing the global economy. Yellen sounded concerned about the lingering uncertainties in the global environment and admitted that the risk from a Brexit was one of the factors in the FOMC’s decision to keep rates on hold today.
With regards to the current outlook, Yellen was cautious, noting the unexpected weakness in business spending so far in 2016 even though recent indicators point to a “sizeable” rebound in economic activity in the second quarter. She also gave conflicting messages on the labor market, saying that the significance of one month’s weak jobs report should not be overblown, while suggesting that the broader measure of unemployment (which includes a wider category of jobseekers) appears to be flattening out.
Market reaction in the currency markets was mostly muted as the dollar briefly fell after the announcement before rebounding back to the levels before the FOMC decision. The dollar hit a fresh October 2014 low of 105.43 yen but managed to recover to around the 106 level in late US session. The euro meanwhile briefly peaked at 1.1298 dollars before settling around 1.1263.
Bond yields and gold prices were more telling though as 10-year US treasuries slid to a low of 1.5737% from around 1.60% before the FOMC announcement. Gold prices meanwhile stood 0.6% higher at $1293 per ounce as the prospect of a near term US rate hike became more elusive, making the yellow metal more attractive to traders.
Perhaps the clearest sign of a July rate hike being off the table was the fact that June’s FOMC vote was unanimous, in contrast to previous meetings where there had been one dissent in favor of a rate increase. Yellen was keen to highlight that all meetings are live and that a July rate hike is possible if the conditions are met and if there is sufficient momentum in the economy. But the markets were less convinced as the fed funds futures prices point to only a 10% probability of a July rate hike after today’s announcement.
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