The Federal Reserve is currently holding its July Monetary Policy meeting from which analysts expect no changes in the federal funds rate.
The Fed’s latest meeting to discuss future monetary policy measures is being held over Tuesday and Wednesday with a decision to be made on Wednesday evening.
Since the Fed decided to increase interest rates in December 2015 – from prior near-zero levels – it has since kept rates steady following a period of extreme market turbulence.
Reluctance to increase the rate further has stemmed from financial turmoil at the start of 2016 and lower than expected economic growth throughout the first quarter.
The Federal Reserve has previously stated that although it has so far refrained from further interest rate increases, two more hikes are likely to come over the next year.
However these hikes may be postponed due to new worries over economic uncertainty since the UK’s vote to leave the European Union.
Federal Reserve Chairwoman Janet Yellen will not be holding a press conference after the meeting. Therefore, all eyes will be on the Fed interest rate decision and the monetary policy statement published at 7pm on Wednesday.
Expectations from the new decision
Analysts expect that the Federal Reserve will refrain from increasing rates this month. The reasons for the expected move include the new increases in market volatility since the Brexit vote as well as political turmoil and terror threats in Europe.
It is also expected that the policy statement which will be published on Wednesday will refrain from giving clear indications about a possible rate increase after the next meeting in September. This has been attributed to ongoing uncertainty about economic performance in the second quarter of the year.
Michael Feroli, chief U.S. economist for J.P. Morgan Chase stated: “I’m not sure they’re quite ready to signal the coast is clear.”
Further analysts expect that this month’s statement will sightly improve conditions in the US labour market in comparison to last month as well as progression towards the goal of steady inflation.
The Research Team at RBS additionally noted that the statement may mention the “acceleration of economic activity (and particularly consumer spending) in Q2 noted previously in the June FOMC statement is likely to be reiterated (especially given expectations that Q2 real GDP growth may approach 3%).”
Market outcomes
It can be expected that the Pound may gain some strength against the Dollar if interest rates remain unchanged. We saw similar movement in the Dollar after the June meeting saw rates unchanged with the GBP/USD climbing 5.6% until falling sharply due to the UK’s Brexit vote.
Unchanged rates are also likely to invigorate price hikes in gold, as the non-interest yielding asset performs better in a low interest rate environment. Gold formerly increased in value since the UK’s Brexit vote induced uncertainty in the markets, but prices started to drop after a spike at 1,367.3 USD/ounce on the 6th of July. They hit a new three-week low at 1313.84 USD/ounce yesterday in the late afternoon on anticipation that the Fed may increase rates soon. But prices have since recovered 0.1% to stand at 1320.61 at 2pm under the assumption that the Fed will refrain from implementing changes this month.
Future outlook on Fed decisions
There will be three more Fed policy meetings this year which are scheduled for Sept. 20-21, Nov. 1-2 and Dec. 13-14 and analysts do expect that rates may be increased in at least one future meeting.
According to the CME Groups FedWatch tool there is currently an 18.8% probability for an increase in rates to 0.5 to 0.75% post the September meeting. The probability the Fed will decide to hike rates in December this year stand at 42.8%.
In addition, the minutes to this month’s meeting will be published on the 17 August and may give some indication as to the future intentions of the Fed to change rates. Michael Hanson, chief economist at the Bank of America believes there is a “greater chance” that the minutes will point in a direction of a September rate hike. He however also mentioned that that April’s minutes made the same indications for June which was ultimately not followed through in action.
Jacob Oubina, senior U.S. economist at RBC Capital Markets, holds the view that the Fed is likely to hold off on further action until June 2017. He pointed towards financial volatility due to a possible Brexit spill-overs, the coming U.S. presidential election as well as elections in France as reasons for the Fed to postpone further contractionary measures.
Katharina Fleiner 26/07/2016
