‘Snoozer’ Fed Meeting Pushes Rate Hike Down the Road
The Federal Open Market Committee’s July meeting came and went without much fanfare this week, as central bank officials announced Wednesday they would once again kick the interest rate can down the road.
Given the economy’s tough-to-read job creation metrics over the last few months and relatively muted inflationary progress – and considering the United Kingdom rocked financial markets only about a month ago when its citizens voted to break away from the European Union – Wednesday’s news came as little surprise to rate-minded analysts.
“Unlike prior rate decisions over the past six months, this one is more of a snoozer,” Brett Ewing, chief market strategist at First Franklin Financial Services, wrote in a research note Wednesday morning, stating there was “almost no chance” that the Fed would boost its benchmark interest rate at this week’s meeting in Washington.
Indeed, the CME Group‘s rate hike-predicting FedWatch tool indicated earlier Wednesday that experts believed there was a less than 4 percent chance the Fed would make a monetary policy adjustment at its July meeting. Not typically one for surprises, the central bank ultimately opted against raising rates.
“The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation,” the FOMC said in its statement Wednesday.
All told, the CME Group suggests there’s a roughly 26 percent chance the Fed will move on interest rates at its September meeting and a 50 percent chance of at least one rate hike by the end of the year. Such a move likely would be dependent upon further labor market and inflation progress, along with global financial stability, which has been anything but guaranteed this year.
“Today’s FOMC statement is another spin on the never-ending merry-go-round of Fed policy expectations in 2016,” Joseph Lake, director of global forecasting at The Economist Intelligence Unit, wrote in a research note Wednesday. “At the start of 2016, the FOMC expected to lift the policy rate four times this year, but with more than half the year already over, it appears no closer to raising it even once.”
Still, consistent economic progress in the months ahead could lead to a rate hike sooner rather than later – which would be great news for monetary policy officials but could complicate the lives of domestic and international investors.
Stocks typically react favorably to news of a rate hike delay, so Wall Street’s record-setting performance in recent weeks likely will be bolstered by the Fed’s inaction. After spending much of the midday trading session in the red, stocks surged only minutes after the Fed released its statement.
If economic momentum starts to build and a September rate hike starts looking like a more realistic possibility, though, volatility could rear its ugly head once again.
“If the two main factors that prevent the Fed from raising rates in July – prior domestic economic and employment weakness, and the potential for a destabilizing spillover from Brexit – are resolved favorably, then the Fed may begin to signal that the next rate hikes are coming earlier than the market expects,” Jeremy Lawson, chief economist at global asset manager Standard Life Investments, wrote in a research note Wednesday. “And that, in turn, may remove one of the pillars that have been driving returns up across all asset classes in recent months.”