US FED CONTINUES TO SIT ON ITS HANDS

By Ruma Dubey

This was such an expected move that the markets too had already discounted it. The US Federal Reserve left the interest rates unchanged. No surprises here. With elections round the corner, there was no way that Yellen would have done anything to rock the boat. Keeping interest rates intact was the safest thing to do and that’s what she did.

But the news here is that in the longer run, the Fed seems to be getting more pessimistic than optimistic. The summary of economic projections, released alongside the post-meeting statement shows that it expects long term interest rates to settle at 2.9%, down from 3% given in June.

More importantly, again no surprise here – the Fed officials (10 of them) stated that they expect only one rate hike in 2016, most likely in December,  two in 2017 and three in 2018 and 2019. This progression of rate hike is much slower than what was given earlier. The Fed has also brought down the growth rate at 1.8%, down from the 2% forecast made in June.

Plotting this dot somehow has lost its credibility as it has most obviously not worked earlier and is more misleading, stoking uncertainty. In December 2015, the dot plot projected four rate rises for 2016. Maybe the dot plot should be binned? Or should one read between the lines and use the dot plot to merely judge the confidence which the Fed has in the economy and future? Clearly, this dot plot is just a moving guidance and not a promise of action.

The big news here was that the voice of dissent grew with three Fed officials casting dissent votes at the meeting – they voted “no” to holding rates steady, wanting the rates to be hiked by 0.25% immediately. This growing dissent (in June it was one) shows that more and more voices are growing that the Fed cannot sit down on its hands permanently; it will need to act and once the elections are done with in November, we could see a rate hike in December. So we now mark December 14th as the date to look for; the members of the FOMC are surely getting antsy with this persistent inaction and before 2016 ends, we could see the token 0.25% rate hike.

Quick look at the highlights:

• The Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent.
• The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.
• The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
• The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.
• The actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
• The Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.

This news has already been discounted for by the Indian markets. The BoJ meet and FOMC meet, both are over and done with. Now what next? We will once again look at Q2FY17 results season in a fortnight from now.  There is a RBI policy meet, the first by the new Governor, Urjit Patel scheduled for 4th October.  So all focus will now shift to that goal post, simply because we really have nothing else to look forward to.