The interest rate on Federal funds remained at the level of 0.5–0.75%, according to a communique on the results of the planned, first in 2017, a meeting of the Federal open market Committee of the fed on 31 January — 1 February. The decision was taken unanimously by all members of the Committee and in line with expectations of market participants. Officials of the Federal reserve until at least March will continue to evaluate the impact of a rate hike in December last year to 25 PPT in the dynamics of economic growth and inflation, and the impact of the policies of the new US President Donald trump on real economic indicators before taking a decision on the rate hike, say the experts interviewed.
Since December 2008, when the rate reached its lowest level of 0-0. 25%, the fed increased it only twice: in December 2015 (25 PP) and in December of 2016. The fed Chairman, Janet Yellen, commenting on recent improving at a press conference, said that in 2017 the rate will increase three times, to 1.5%.
Published on the website of the Federal reserve on 1 February communiqué did not contain clear signals about the timing of further rate increases. It notes, in particular, that the decision was made based on the analysis of data on the labor market and inflation. “Information received after the December meeting suggests that the labor market continues satisfied, and economic activity growing at a moderate pace. The increase in the number of jobs remains high, and unemployment was close to the level of the recent low (in December, it increased from a minimum of nine years of 4.6% was 1 PP). Household spending continued to grow at a moderate pace, while business investment in fixed capital remain constrained. Consumer and business confidence recently has improved,” the report said.
Consumer prices in recent quarters showed growth, but inflation still remains below its long-term target of 2%, the Committee noted. Market indicators of inflation compensation remains low. Most of the indicators of long-term inflation expectations based on surveys, in General, has changed insignificantly.
The Committee expects that, with smooth adjustment of monetary policy, economic activity will continue to grow at a moderate pace, labour market indicators will strengthen, and inflation will reach 2% in the medium term. Short-term risks to the economic Outlook appear broadly balanced, adds the Committee.
“Taking into account past and anticipated conditions in the labor market and inflation, the Committee decided to keep the target range for the Federal funds rate for Federal funds from 0.50 to 0.75%. Monetary policy remains stimulative,” — said the Committee, noting that in determining the trajectory of the rates, it will evaluate the completed and anticipated economic conditions in comparison with the target (maximum employment and inflation of 2%). “This assessment will consider a wide range of data, including indicators of conditions in the labour market, indicators of inflationary pressures and inflation expectations and data on changes in the global economy and financial system”, — stressed the Committee.
The fed expects that the dynamics of the economic environment will give rise only to smooth rate increases. “Maybe rate some time will be below the level that will prevail in the long run. But the actual dynamics of its changes will depend on the economic forecast, which is based on incoming data,” reads the communiqué.
The next meeting of the Committee on open markets FRS will take place on March 14-15. In contrast to the February meeting it will be followed by a press conference Yellen and the publication of macroeconomic projections.
The reaction of the markets
After the announcement of the fed decision the price of Brent oil slightly accelerated growth. 22:06 the price of the April Brent futures grew by 1.51% to $56,42 per barrel. Before the decision height was about 1%. The March futures for WTI increased from 1 to 1.3% and was worth about $53.5 per barrel.
The April gold futures on the Comex almost did not react to $1.2 thousand per Troy ounce.
The dollar against the world currencies continued to rise. As of 22:07 GMT the dollar index (dollar to a basket of currencies of six countries — key trading partners of the United States) grew by 0.45%, up to 100 points. Before the announcement of the outcome of the meeting, the dollar rose in price on 0,39%, to 99.94 points.
Key US stocks ahead of the announcement showed mixed trends: Dow Jones Industrial Average grew by less than 0.1%, the Nasdaq Composite is 0.3%, and Standard & Poor’s 500 was down 0.2%. 22:20 GMT, all three indices increased from 0.1 to 0.5%.
The yield on the us 10-year government bonds increased by almost 3 basis points, to 2.5%.
When to expect improvement
Bloomberg surveyed investors estimate the probability of a rate hike in March is around 30%, in June — about 70%. The surveyed analysts also expect a rate hike in the summer. One month is too small to assess the impact of the new rates on the economy. In addition, there is uncertainty regarding future fiscal policy trump, says analyst IK “Finam” Bogdan Zvarich and chief economist at Danske Bank Vladimir miklashevskii.
“In the first months of the impact of the rate hike on cash flow, is manifested not so clearly, explains Zvarych. — The money entered the economy at the new rate, it will take some time. Now loans recruited at different rates. It all depends on the operations used by certain organizations. Thus, the raised rates will soon impact on the weekly REPO. But if the REPO is taken for a year, with a stable rate not providing the change impact will occur not soon”, — he explains. It is unclear to him and how to behave in inflation.
“Secondly, it is not entirely clear prospects for the American economy in light of the arrival of a new President and new administration. No understanding of how trump will keep his campaign promises, including increased investment in infrastructure and tax cuts. In this respect, the fed is likely to take a wait and depending on how there will be circumstances that will make the decision,” he says.
The uncertainty in relation to promises of investments in infrastructure and tax reforms trump says miklashevskii. However, he believes that given the fact that the new President started to implement some of the promises (associated with restrictions on the entry of refugees and immigrants from Arab countries. —) from the first days of inauguration, “a high probability that soon it will begin to implement other promises, including protectionism, the imposition of customs duties”.
ING analysts are expressing a more assertive stance regarding the rate increase. In their review, they predict it will improve in March, as “promises trump start”. In their opinion, the economic and inflation indicators point to the need to strengthen monetary policy. Analysts at ING think that “in any case, financial incentives in the administration trump will be greater than under the administration of Clinton.” This, in their opinion, should lead to economic growth, higher inflation and increasing interest rates.