The Federal Reserve met market expectations fully. It upgraded its assessment of the economy, recognized that the near-term risks had diminished, and remained committed to normalizing monetary policy. There was one dissent from the steady stance, and it the KC Fed President had already tipped her hand.
The Federal Reserve’s two-day meeting concludes today. There is little doubt that it will stand pat. There is not press conference afterward, so the statement is the only thing investors will get. The statement is important. We argue that the FOMC statement is the clearest expression of the views of the Fed’s leadership. The minutes are more comprehensive they dilute the signal from the Fed’s leadership, and it conflates the difference between voters and non-voters and between the Governors and regional Presidents.
Contrary to conventional wisdom, we think monetary policy remains an important variable for asset prices. Interest rates and foreign exchange are two dimensions of the price of money. There is a relationship, even if it is not linear or temporally consistent.
Draghi said nothing that surprised the market. He acknowledged the resilience of the markets in the aftermath of the UK referendum. He also noted that with new staff forecasts, next September, and the upcoming data, the ECB would be in a better position to assess the macroeconomic situation. The risks to growth remain tilted to the downside.
If the United States Federal Reserve tightens or eases monetary conditions, this impacts emerging economies. Over the years since the global financial crisis, a second type of spillover has emerged: spillovers stemming from the uncertainty about future monetary policy. Uncertainty spillovers exist above and beyond those stemming from specific policy steps.
The Bank of England surprised many, if not most, participants by not changing policy. There was no rate cut and no asset purchase plan.
However, there can be little doubt that the BOE will take action next month. The minutes indicate that officials are considering a package of measures that will be aimed at supporting growth. This could include new asset purchases.
After a nearly three weeks of turmoil following the UK referendum, there is now a sense of order returning to UK politics. Two elements of the new government are particularly relevant. First, May demonstrates strategic prowess by putting those like Johnson and Davis, who campaigned for Brexit, to lead the negotiations with the EU, while putting Tories who favored remaining in the EU in the internal ministries.
Investors are debating over whether the Bank of England ease policy at the July 14 MPC meeting or wait until August Quarterly Inflation Report when new post-Brexit forecasts will be ready. There are many dimensions to monetary policy, and the first move could come next week.
The global capital markets have quieted considerably since the start of the week. Month and quarter-end considerations appear to be playing a role. In addition, there is a sense it will take some time to sort things out.
Negative interest rates may be coming to America. A reality in Japan for years and a growing trend throughout Europe, negative interest rates on government bonds have wreaked havoc on financial markets and standard economic models of bond prices and monetary theory.
Negative interest rate policies, or NIRP, are intentional moves by Central Bankers to cause buyers of bonds to actually pay debtors for the privilege of lending them money.
