UNCHANGED BUT UNCERTAIN - THAT'S THE FEDS STANCE

By Research Desk
about 9 years ago

 

By Ruma Dubey

The markets were as such rattled when the US today evening (morning in USA) announced a dismal set of GDP numbers. It was a shock that the US economy which had shown sure signs of a smart bounce back, actually stalled in the first quarter, Jan-March’ 15 period. The GDP expanded by a mere 0.2% while it had grown 2.2% in Q4 and 5% in Q3. This growth is Q1 might as well have not happened at all. It was batting an eyelid when asked to move a body part!

And this more or less prepared us for a status quo Federal Meet later in the night (afternoon in USA). With the current numbers showing that the economy was nowhere near achieving its inflation and employment growth target, it would have been pretty foolish to expect a rate hike at today’s concluded Fed meet. The Fed left the rates unchanged; so they remain near zero per cent where they have been since Dec 2008.

Today’s Fed Meet was just about issuing a Press statement; there was no ensuing Press Conference or speech to be followed. A quick look at what the statement was all about:

  • Fed acknowledged that the economic growth slowed during the winter months while saying that this was in part reflecting “transitory factors”.

 

  • Keeping the interest rates steady, the Fed said, “To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate”.

 

  • Pace of job gains moderated, and the unemployment rate remained steady.

 

  • Growth in household spending declined; households' real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remains high.

 

  • Business fixed investment softened, the recovery in the housing sector remained slow, and exports declined.

 

  • Inflation continued to run below the Committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports.

 

  • Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate.

 

  • How long will rates remain unchanged? The fed said, “ the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2% inflation.”

 

  • The Committee anticipates that it will be appropriate to 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 % objective over the medium term.

And for all those who are anticipating a rate hike in June, this statement more or less nails it down to much later, in Sept. The Fed said, “ When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2% . 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.”

So that’s that! No rate hike as of now, which was a no-brainer. But the indication we get from this statement of the Fed is that it will happen later and not sooner.  Clearly, the Fed would like to see more signs of a rebound in Q2 as currently, there are some fears that headwinds from a strong dollar and drop in oil investment might persist.

The US markets are down as the perception is that uncertainty over the rate hike just continues – June or July or September?

For our Indian markets, this should ideally be a reason to feel good but given the sullen mood in which it is currently, we might see some liftoff but later it could once again sulk and be ruled by result-specific stocks.  As far as the Indian markets are concerned, this was a non-event; it now wants action in its own country; getting some Bills passed could be a beginning.

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