Fed may raise rates once more before year end

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Following the meeting of the Federal open market Committee (FOMC), the fed from September 25-26, the Federal funds rate (FFR) expected was increased by +0.25 percentage points to a range of 2.00 to 2.25%. The decision was taken unanimously by all members of the Committee. Raising the benchmark was the third this year after March and June decisions, and since the beginning of the tightening cycle of monetary policy in December 2015 – the eighth.
The Committee meeting of 26 September were more neutral. Notable was the refusal to refer to monetary policy as “stimulus” (“accommodative”), which some participants in the market was perceived as a “soft” signal, which may indicate the approach of rates to the neutral level. However, at a press conference the fed Chairman John. Powell noted that the refusal to refer to policies as “stimulus” is not indicating any changes in the overall orientation of policy.
In the document, the FOMC noted the continued improvement of the labour market, and the growth of economic activity were characterized as strong. Recall that, according to the 2nd estimate of US GDP in the 2nd quarter of this year grew +3.8% (in recalculation on annual rates) – a maximum height, starting from the 3rd quarter of 2014. The unemployment rate in August was 3.9% (-1,1 p. p. below the target controller). The communiqué also noted the continuation of strong growth in consumer spending and greater investment by businesses in fixed assets.
It is important to note the absence of indications to the growth of long-term inflation risks and the thesis that indicators of long-term inflation expectations in General vary slightly. In annual terms, total inflation and inflation excluding prices of food and fuel remain close to the 2% – refers to indicators PCE and Core PCE (targetrule regulator).
According to the updated forecast, GDP growth this year will be 3.1 per cent (previously +2.8%) and in 2019 – 2020 – +2.5% and +2.0% respectively (vs. +2.4% and +2.0% previously). The unemployment rate will further decrease by the end of this year to 3.7% in 2019-2020 will be 3.5%. Expectations for Core PCE index for the current year and +2.0% in 2019-2020 years +2,1% – the forecasts remained unchanged.
The FOMC is expected to further increase the FFR to the end of the current year – to 2.25 – 2.50 percent and three additional “step” for benchmark next year, as predicted earlier.
According to the current futures rate, the likelihood of raising the FFR at the meeting in November is estimated as zero in December – about 78%. According to the Bloomberg survey, completed in the beginning of the week, the FOMC will raise FFR by +0.25 p. p. on a quarterly basis until June 2019. Thus, market participants expect that the upper bound of the target range rate will reach 3.0 per cent by mid-2019, the next increase is projected no earlier than the 4th quarter of 2019.
On a press-conferences the Chairman of the fed by George. Powell gave a generally upbeat assessment of the situation in the US economy. According to him, the economy is growing rapidly, unemployment remained low, while inflation has stabilized. The fed Chairman noted that the growing tensions in the international trade remains the center of attention of the regulator, but it has not yet reached the level which would have caused serious concern among the FOMC members.
Noted that in determining the timing and quantities of future adjustments to target range of interest rates, the Committee will assess realized and expected economic conditions in comparison with the targets – maximum employment and inflation of 2%.
This assessment will consider a wide range of information, including indicators of conditions in the labour market, indicators of inflation and inflation expectations and data on changes in financial and international conditions.
It should be noted that D. trump has repeatedly criticized the policy of the fed, stating that he was not happy about the rate increase. The relevant statements from the President of the United States was made after yesterday’s decision of the regulator, however, while the comments and actions of the FOMC do not give any grounds to speak about the suspension of the tightening cycle of monetary policy.
The initial market reaction to the results of the meeting of the American regulator in General have been moderate. American stock indices changed minimally, the S&P 500 by 0.3%, the Dow Jones into deflation at -0.4%, NASDAQ Composite down -0.2%.
Oil prices and gold showed moderate and mixed changes (closing September 25): +0,4% (for Brent), and -0.3%, respectively. The yield of UST-10 responded the most to the closure fell by -7. b. p. to ~of 3.03%, the whole curve dropped by about -4 b.p. and its slope became more flat. The dollar index DXY rose by +0,4% – up to 94.5%, while the greenback was devalvirovat 0.5% to 1.17, although in this case the Euro could have a negative impact and a growth factor of political tension in Italy.
The Russian market at the opening shows a moderate growth of +0.5% index Mosberg and RTS. OFZ curve remained virtually unchanged on average -2 b.p.), as a sovereign Eurobond curve has shifted down by -4 b. p., mostly in the middle and far segments. The ruble at the opening have changed minimally, the current price of the dollar is 65,8 RUB.
Dmitry Harlampiev,
Director of Analytics of Bank “Opening”