Monex Europe | The FOMC kept rates unchanged, extended its swap facility, and added language to its statement emphasizing that the path of the US economy depended heavily on the path of the virus. In our view, outcome-based forward guidance is likely as early as September, when the FOMC will have a new batch of projections, as well as hard data indicating the costs of the second wave of COVID-19 infections.
Financial markets expect the US Federal Reserve (Fed) to raise its federal funds target rate on Wednesday for the fourth time this year, by 25 basis points (i.e. between 2.25% and 2.50%). Looking ahead, the FOMC will likely revise its “dots” lower for 2019, while the Fed will emphasise data dependence as relevant for its policy stance, rather than guidance by FOMC ‘dots’.
The minutes released by the FED and the ECB last week shared concern about how to inform about their monetary stance. They fear unsettling the markets should investors wrongly interpret the messages conveyed to them. When you lack a clear policy perspective, the best thing you can do is to manage communication in a fairly tight way.
The minutes of the Fed’s late July meeting released yesterday reflect ongoing concern about muted inflation data, as well as the fact there seems to be some discrepancy amongst FOMC members over when would be the right time to begin the normalisation of the central bank’s balance sheet.
The summer lull may continue to dampen stock market activity during the month of August, but there are two key events on the investor agenda this week. German GDP figures for Q2 and the minutes of the Fed’s late July meeting.
There is not much in the way of major macro or corporate data due this week, but markets will be on the alert for any hints from regional Federal Reserve Chiefs’ as to what the US central bank’s next moves will be.
Why does the Fed continue to be a glutton for punishment, repeatedly announcing for over a year that it is going to raise interest rates, then having to put the decision on hold? Yet again it has announced it will have to hike rates before end-year, possibly twice, and perhaps, once more, it will have to back down.
The minutes of the FOMC’s policy meeting July 26-27 showed voting members were split over whether to raise US rates soon. The majority of the committee believe more macro data is needed before hiking rates, but some expect a move will be needed sooner rather than later.
The recent disclosure of the April FOMC minutes has come as a shock. Investors expected a cautious wait-and-see stance by the Federal Reserve at that meeting. But now we discover that a majority of its members openly supported a rate hike at the June gathering, should macro-economic delivery prove reasonably upbeat.
James Alexander via Historinhas | As the FOMC increasingly avers that it is data-driven the demand to have better data has led to greater focus on aggregated current data. Whether the FOMC really looks at it, given it is ignoring its own Labour Market Conditions Index, is hard to say.