NO SURPRISES HERE - FED KEEPS RATES UNCHANGED
By Ruma Dubey
The timing itself was so wrong. Last month’s job data was discouraging. And then there is the looming Brexit referendum on the 23rd. With such a big event ahead, surely there was no way that the US Fed would have added more to the global turblence. Last time itself, Yellen had talked about the Brexit and the uncertainty it represented. Thus it came as absolutely no surprise to see this FOMC meet not hiking interest rates.
So when increase in rate was ruled out, what were we actually looking out for? Firstly, will there be two or three rate hikes this year? Secondly, assessment of the employment outlook and then inflation –whether it will rise to 2% as quickly as Yellen expected. Will the ‘dots’ shift or stay where they are – which pertains to the economic projections.
A look at the highlights of the FOMC statement:
- No change in interest rates – it remains unchanged at 0.25 percent to 0.5 percent, the first unanimous decision since January.
- No clues in the statement about what to expect in July.
- First the economic projections – 2016 projections remain unchanged at 0.9%, implying two rate increases this year.
- It brought down the interest rate projections for 2017 – rates expected to rise to a median of 1.6% and 2.4% in 2018, which is down from 1.9% and 3% respectively during their March projections.
- Longer term, Fed expects rates to rise to only 3%, down from 3.3% as announced in March.
- Inflation – expected to be at 1.4% in 2016 v/s earlier projection of 1.2% and target is 2% in 2018.
Post this policy statement, most analysts expect now the Fed to hike only once and not twice this year. It is expected to be a much slower rise than earlier expected.
What happens to the Indian markets in the morning? This is exactly what was expected thus this uncertainty will end. And we have our own domestic triggers to look forward to. The civil aviation policy was a big hit today and with the monsoon session coming upon us, it seems like a certainty this time that the GST will indeed become a reality from 1st April 2017. Undoubtedly that will be the biggest trigger for the market. As such all eyes are on monsoon and once that comes down pouring, we could very much have a very good second half to look forward to.
For now, let’s get through this week as Brexit referendum happens next week.