While you were sleeping: Fed hits rate pause button

Thursday 16th June 2016

The Federal Open Market Committee kept interest rates on hold, and signalled an even more gradual path for any future rate increases, bolstering bets on both equities and US Treasuries. Still gains were checked by global growth worries.

“The pace of improvement in the labour market has slowed while growth in economic activity appears to have picked up,” the FOMC said in a statement at the end of its two-day policy meeting.

The Fed predicts “only gradual increases” in its target interest rate.

“The federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run,” the FOMC said in its statement.

The median projection of officials for the federal funds rate suggested two quarter-point increases in the FOMC’s four remaining meetings this year.

"It's as dovish as the Fed can get without actually cutting rates," Brian Jacobsen, chief portfolio strategist at Wells Fargo Fund Management, told Reuters. "Even [Kansas City Fed President] Esther George withdrew her dissent. The path of rates is lower, which is a big dovish swing."

Importantly, the number of officials who predict one rate hike this year climbed to six, up from one in March. US Treasuries rose, pushing the yield on the 10-year note three basis points lower to 1.58 percent

“That’s a big shift and an important one—it helps the overall bond market for the Fed and the investor outlook to be as close as possible,” Jim Vogel, head of interest-rate strategy at FTN Financial in Memphis, Tennessee, told Bloomberg about the change in officials’ projections.

“This should reduce volatility and allow Treasury investors to focus on what’s coming ahead rather than devote energy to what the Fed may be doing," Vogel noted.

In 3.09pm New York trading, the Dow Jones Industrial Average gained 0.36 percent, while the Nasdaq Composite Index added 0.37 percent. In 2.54pm trading, the Standard & Poor’s 500 Index advanced 0.27 percent.

Gains in shares of Home Depot and those of General Electric, up 1.5 percent and 1.3 percent respectively, led the Dow higher. Shares of Intel and Cisco fell, down 1 percent and 0.5 percent respectively, for the biggest percentage declines in the Dow.

In Europe, the Stoxx 600 Index finished the day with a gain of 1 percent from the previous close. The UK’s FTSE 100 index rose 0.7 percent, Germany’s DAX index increased 0.9 percent, while France’s CAC 40 index moved 1 percent higher.

In a press conference after the FOMC meeting, Fed Chair Janet Yellen said the June 23 referendum in the UK on whether to remain in the European Union influenced the US central bank’s decision to keep interest rates unchanged.

“It is a decision that could have consequences for economic and financial conditions in global financial markets,” Yellen said, Bloomberg reported. A vote by Britons to leave the EU “could have consequences in turn for the US economic outlook,” she said.

BusinessDesk.co.nz

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