The dot plot the recent FOMC meeting was curious. We noted right away that inexplicably there was one official that apparently anticipated one hike this year and then no hikes in 2017 or 2018. There was also one dot that was missing for a long-term view.
The Federal Reserve modified its stance yesterday without changing rates. It is not just about how fast the Fed sees itself normalizing monetary policy but also where the level of the equilibrium rate.
The Federal Reserve anticipated a more gradual tightening path going forward. This weighed on the dollar and lifted equities. August Fed funds futures imply less of a chance of a hike next month. It is now consistent with an 8% chance of a hike, which is less than half the probability assigned at the end of last week.
Following today’s FOMC meeting, the central banks of Japan, Switzerland, and the UK meet tomorrow. The SNB will keep its powder dry to be able to respond to the results of the UK referendum if needed. The Bank of England is also on hold.
More fund managers are preparing for a steep decline in stocks as the Federal Reserve announces whether it will raise interest rates. The Federal Open Market Committee press release, due Wednesday afternoon, is a much-awaited announcement on whether this is the meeting where the Federal Reserve will change monetary policy.
After months of pricing in a low chance of a rate hike, markets reacted sharply last month after several Fed executives gave public speeches and interviews asserting the strength of the American economy and the need to rein in inflation.
The FOMC meeting later today, with updated economic projections and a press conference, is the key event of the day, even though three other central banks meet over the next 24 hours. Investors should know four things before the FOMC meeting.
A couple of weeks ago, the four central banks that meet in the coming days were thought to be a big deal. Numerous Federal Reserve officials were preparing the market for a summer hike. Risks of a new downturn in Japan spurred speculation that BOJ would ease policy.
On the other hand, the neither the Bank of England nor the Swiss National Bank were expected to move ahead of the UK referendum on June 23. Besides providing extra liquidity to the banks in the ahead of the vote, the BOE was understood as being in a reactive posture as was the SNB.
One of the most significant new developments in the global post-global financial crisis (GFC) economy is the enormous asset purchase programs implemented by central banks in the industrial world to stimulate their economies. Widely known as quantitative easing (QE) programs, their impact has been substantial.
The most important element in next week’s FOMC meeting may come from the dot plot and whether the Fed officials are backing away from the two hikes thought appropriate in March.
When looking the schedule of FOMC meetings, and understanding that when the Fed says “gradual” to describe the normalization process, it does not mean hiking at back-to-back meetings, seeing two hikes this year without a summer move is difficult.
In March, the ECB decided to increase its asset purchases from 60 to 80 bln euros a month and to include corporate bonds. The corporate bond-buying program begins this week. We use an FAQ format to discuss the key issues.
What is the ECB doing? The ECB will buy euro-denominated, investment grade bonds from companies incorporated within the Eurozone.
What is the duration of the corporate bonds that the ECB will buy? The ECB will purchase bonds that mature in six months to 30 years.
