Federal Reserve leaves markets confused about timing of rate rise

 

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The Independent Online

America’s central bank last night sent a carefully nuanced message over the timing of its first interest rate rise, leaving financial markets scrambling to make sense of its meaning.

In the statement, released after its regular two-day meeting, the Federal Reserve seemed to move away from its long-standing pledge to keep rates at near zero for a “considerable time” and instead said it would adopt a “patient” approach in deciding when to raise the cost of borrowing.

“Based on its current assessment, the Committee judges it can be patient in beginning to normalize the stance of monetary policy” it said. But the Fed muddied the water by adding this new view was “consistent” with its previous “considerable time” statements. Analysts were fixated on the question of whether the phrase would be retained in the run-up to the decision. Debt markets yo-yoed.

 The yields on 10 year Treasury bills first fell three basis points to 2.07 per cent after the statement but then bounced back up, as traders weighed if the statement meant a rate rise was likely to come in the middle of next year as widely expected. Futures contracts showed traders shifting their bets on the first rate back to October, rather than September previously.

“The statement had something for everyone but it does not dissuade us that unexpectedly strong employment growth over the next few months will prompt the Fed to hike rates next March, sooner than most others expect” said Paul Ashworth of Capital Economics. Equity markets were initially buoyed by the statement, which was bullish about the prospects for the US economy, with the S&P 500 index rising 1.7 per cent after the release. New forecasts also released by the Fed yesterday showed policymakers expect the world’s largest economy to remain on track despite a weakening global environment.

The decision was passed by the Federal Open Markets Committee by a seven to three member majority. One member, Richard Fisher, argued the US economy was stronger than the committee was relaying. Another, Narayana Kocherlakota, said the decision created a risk of undershooting the 2 per cent inflation target. Charles Plosser disagreed with the decision to emphasise the consistency of the latest statement with previous statements.

The chair of the Fed, Janet Yellen, said almost all members expected interest rates to rise in 2015. US interest rates were cut to near zero in December 2008 as the global financial crisis took hold and remained there ever since.

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