The protracted pause
On Wednesday evening, March 16, the Committee on open market operations Federal reserve concluded a two-day policy meeting, which decided to leave benchmark interest rate unchanged at 0.25–0.5%. In December last year, the fed for the first time since 2006 raised its key interest rate by 25 b.p., explaining that the U.S. economy is strong enough to start normalizing monetary policy. The fed chief Janet Yellen in the December press conference hinted at the possibility of further rate hike in 2016, but in the first two meetings of 2016, the fed could not continue the normalization policy.
“Information received since the last fed meeting in January shows that the pace of economic development remains modest”, the report said the American regulator. Meanwhile, global economic development and financial markets continue to pose a danger, said the fed.
In January, the fed noted that when making decisions about further normalization of monetary policy will be guided primarily by the rate of inflation, data on the labor market and the global economy.
“Published a few hours before the adjournment of the meeting of the inflation data was in favour of tightening policy in the second half of the year inflation close to the target value in 2%. Close to the targets and the official employment figures,” says chief expert at the Center for economic forecasting Gazprombank Yegor Susin. The unemployment rate in the U.S. in February remained at 4.9%, which is close to the mark that says full employment.
“Against tightening policy says weak economic growth, poor situation in the industry in February, industrial production decreased by 0.5%, consumer demand remains weak, companies are working at the warehouse,” says Susin. A limiting factor remains the state of the global economy, he adds.
The markets on Wednesday estimated the probability of rate increase only 4% and practically did not react to the decision of the American regulator. American stock index S&P during the day was declining, but immediately after the meeting, rose 0.5% to 2023 points. The Euro immediately after the fed decision rose by 0.7% against the dollar to 1.12 $ /Euro. Brent crude on the decision of the American regulator broke the mark of $40 per barrel, rising by 2.5% to the opening level.
Waiting for the hints
The main interest is not the fed’s decision – almost no one expected a rate hike at today’s meeting, and the comment of the head of the American regulator Janet Yellen, says chief economist at Alfa Bank Natalia Orlova. “This is the first meeting after the decision of the European Central Bank to lower its key interest rate to zero, and it is important to understand whether the fed react to the changing policy of the European regulator,” explains Orlova.
According to the new statement, the consensus forecast suggests the fed’s two rate increases in 2016 against four enhancements that the regulator had forecast in December. “Markets appear to be on some easing from the fed, and the fed change of plans means that we return to the old song, when Central banks return to soft monetary policy and appetite for risk will recover,” she adds.
Interest and makroekonomiskie updated forecasts that the fed published, the analyst on macroeconomic policies at the global markets VTB Capital, Neil MacKinnon. The main idea of the January statement was that economic activity will grow at a moderate pace and labour market indicators will continue to improve. For inflation, it was said that she “expected to remain low in the short term,” but over time will return to 2% of the corresponding target level. “From the moment the US stock markets recovered, oil prices rose and credit spreads narrowed. Inflation expectations stopped falling. U.S. macroeconomic indicators have generally improved, and the situation on the labour market has stabilized,” explains McKinnon.
According to the new forecasts predict the growth of U.S. GDP was lowered from December’s 2.4% to 2.2%, the inflation forecast was lowered from 1.6% to 1.2%, according to a message controller. The unemployment forecast remains at the level of 4.7%.
After the December fed meeting, investors began to count on four further increase for 2016, but due to the volatility in the financial markets and of uncertain prospects for the global economy in the beginning of the year they had to significantly temper your expectations, is reminiscent of McKinnon. Now the futures market rate for Federal funds lays in rates of approximately 50% probability that the rate will be raised by 25bps.p. at the June meeting.