Market commentary: FOMC meeting roundup

The main event of yesterday was the Fed meeting which every market participant was keenly waiting for. No great surprises, as the Fed kept its target rate on hold.

Data suggests that the US economy has been improving in general terms but some areas remain soft. As an answer to one of the questions, Chairperson Yellen also mentioned that credit availability remains low. In general, activity has been expanding moderately with the pace of job gains picking up whilst the unemployment rate remained steady.

On the other hand, investment and net exports remained on the low side. Inflation also remains way below the Fed target rate of 2 per cent due to many factors, including the declines in energy prices. Oil has now seem to have somewhat stabilised and therefore inflation could eventually be normalised. Inflation is expected to remain at these low levels for the short term but is expected to gradually rise towards the 2% level as recent oil shocks dissipate.

The main question is not if the Fed will raise rates. This is a known fact and it will happen but most of the focus remains a question of when, and more importantly, the pace at which the subsequent rate hikes will occur.

The Federal Open market committee stated in its statement that was released last night, that when the time comes for interest rates to start being increased they will take a balanced approach.

As an answer to another question Yellen said that the hikes will be gradual, possibly at a slower pace than the market was previously discounting. She also mentioned that a lot of importance is being given to the timing and augured that everyone should look at the policy trajectory rather than just the timing.

Chair Yellen reiterated that the timing will be data dependent where economic and financial conditions together with international developments will be taken into consideration.

The FOMC statement stated that “even after emolyment and inflation are near mandate consistent levels, economic conditions may, for some time, warrant keeping the target federal funds below levels the Committee views as normal in the longer run”.

Committee members seem to agree that the first rate hike should happen in 2015. Consensus in the market as at yesterday was that the first rate hike will not come before September this year. It is interesting to now see if the market changes its stance and what the consensus in terms of expectations for the timing of the first rate hike will be. The Fed improved its outlook on the longer term but decreased its forecast in the shorter term.

This article was issued by Darin Pace, Treasury Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.