Another non-committal non-event

July 28, 2016

As widely expected, the Fed opted once again to refrain from raising interest rates after its two-day meeting concluded on Wednesday afternoon. And as usual, market-watchers dug feverishly into the policy statement searching for any clues as to potential guidance on future rate hikes, but were again largely disappointed despite the fact that the Fed did acknowledge some economic improvement.

Generally, the FOMC statement was changed modestly from previous months, projecting neither a substantially hawkish nor dovish outlook. One conspicuous addition to the statement that could be considered significantly hawkish, however, was the assertion that “near-term risks to the economic outlook have diminished.” The Fed also recognized improvements in the economy, especially with respect to the employment picture, stating that “the labor market strengthened and economic activity has been expanding at a moderate rate.” Additionally, “household spending has been growing strongly.”

At the same time, however, what has remained constant from June were concerns over inflation, as the Fed reiterated, “inflation has continued to run below the Committee’s 2 percent longer-run objective.” Another negative that was in June’s statement and repeated today was that “business fixed investment has been soft.” The statement additionally repeated its frequently asserted phrases that it expected “only gradual increases in the federal funds rate” and that the path of rate increases “will depend on the economic outlook as informed by incoming data.” There was only one dissenting vote, Kansas City Fed President Esther George, who voted for a rate hike.

Overall, while the door has been kept open for a September or December move, any such rise in interest rates will be dependent, as usual, on economic data going forward. This has once again prolonged market uncertainty and led to some volatile fluctuations in financial markets. The initial reaction after the release of the FOMC statement prompted a hawk-driven spike down for both equities and gold, and a quick rise in the US dollar. Shortly after, as the markets digested the implications of the Fed’s non-committal non-action, however, these moves reversed sharply. Stocks and gold began to surge while the dollar plunged.

With a Fed rate hike out of the way for now, the world’s central banks continue overall to show a strongly-dovish easing bias. Next up is the Bank of Japan on Friday, which could very well strengthen this trending bias even further.

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