Once again markets got it right

22 September, 2016

“We trust the economy, yet not enough to tighten monetary policy” this was the message sent by Chair Janet Yellen to markets on Wednesday to explain the motives for keeping rates on hold in September.

Although the monetary policy decision was viewed as dovish which sent equities higher across the board and the dollar lower, the Federal Reserve has never been seen as divided so far this year.

Three out of the ten voting members dissented against the decision, calling for an immediate rate hike, this made the call for a December rate increase much stronger. Although Yellen confirmed that a November meeting is a live one, her body language didn’t really reflect high confidence and neither markets did buy it with only 12% priced in for a move in November.

Key takeaways from the Fed’s decision:

Major changes in statement: “The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.” A strong signal that a move will come by December.

Dots continue to fall: The “dot plot” used by Federal Reserve members to mark their expectations for the path of interest rates showed 25 basis points increase by end of year, but more interestingly projections were scaled down in 2017 and over the longer run, suggesting a new normal for interest rates. In 2017 expectations are now for two rate hikes instead of three, and to reach 2.9% on the longer run versus 3% in June’s projections.

Growth scaled down: Growth expectations were trimmed by 0.2% in 2016 to 1.8%. Remarkably, the 2% magical number is hard to reach on the longer run too, with medium forecast falling to 1.8% from 2%.

Equities rise, yields slump

Markets received a boost today with Asian and European equities following Wall Street higher after Nasdaq Composite closed at a record high. European bond markets also got a lift with yields dropping across the curve. Yields on German 10 year bonds fell back into negative territory, while UK bonds among the best performers with yields on 10, 15 and 30 years gilts falling more than 7 basis points.


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