FED KEEPS RATES UNCHANGED; KEEPS SEPT OR DEC UNCERTAINTY INTACT
By Ruma Dubey
Well, it comes as no surprise – the US Federal Reserve has for now, kept its rate target on hold but what comes forth very clearly is that before 2015 ends, there will surely be at least one rate hike on the cards. That’s the only certainty we have for now’ which does not really mean much as the very same certainty existed even before the Fed statement of tonight. So we continue to live in suspense – will the rate hike come in September or will be it December?
Another “question” emerging – if one rate hike is certain before end of 2015, will the Fed increase rate by 0.25% or go for the jugular with a 0.50%. But putting these fear mongers to rest, Yellen began the Press Conference saying that one should not overreact to the first rate hike and said that even after the first rate hike, the Fed’s policy will continue to remain accommodative.
One more positive from the statement - right at the end of the statement, the Fed says, “The committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.” This sends the message across that we are looking at December and not September.
At the ensuing Press Conference, when asked about the timing of the rate hike, Yellen said, “No decision has been made by the committee as to what the right timing is for an increase. It will depend on unfolding data.”
For the first time probably, the Fed took cognizance of the steep rise of the dollar, linking it to soft exports which was keeping down economic growth and falling price of non-energy imports which in turn was preventing inflation from rising to Fed’s 2% target.
Highlights of the Fed statement:
- Fed says job gains pick up, staying on track for 2015 rate rise
- Economic activity has been expanding moderately after having changed little during the first quarter.
- The pace of job gains picked up while the unemployment rate remained steady.
- The Fed expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate.
- It reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.
- It will raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
The Indian markets are expected to be largely happy with this Fed statement. More significantly, it will react positively to the various decisions taken by the Govt yesterday - rise in Minimum Support price (MSP) for paddy and pulses. It might give wind to inflation but the MSP rate hike is much below what was expected.
That apart, the Cabinet approved launch of a ‘Housing for All by 2022’ scheme for urban areas under which central assistance in the range of Rs.1 lakh to Rs.2.3 lakh per beneficiary will be provided based on the category of the scheme.
It also revised the income ceiling for loans to the economically weaker to Rs.3 lakh per annum from Rs.1 lakh earlier and the ceiling for the low income group has been hiked to Rs.6 lakh per annum from the earlier Rs.3 lakh. The changes will bring more people under the beneficiary bracket. These decisions are sure to send the realty and housing finance company stocks into a tizzy.
The only dark cloud for the moment on the horizon, with monsoon also doing well for now, is the Greek crisis. The fallout for India, if Greece exits Eurozone might not be a make or a break; it could evince minimal reaction if things are good on the domestic front. Yes, currently, as India goes to sleep, the promise of the new dawn tomorrow looks rainbow hued.
For a full read of the Fed statement - http://www.federalreserve.gov/newsevents/press/monetary/20150617a.htm