While you were sleeping: Dovish Fed stands pat

Friday 18th September 2015

US equities and Treasuries rose, while the greenback fell, after the US Federal Reserve kept its benchmark interest rate unchanged while flagging a potential hike as early as next month.

Policy makers kept the benchmark federal funds rate at zero to 0.25 percent, with Richmond Fed President Jeffrey Lacker as the sole Federal Open Market Committee member who voted in favour lifting the target rate by 0.25 percentage point.

“Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,” the Fed said in a statement released after the end of its two day meeting.

“The Committee continues to see the risks to the outlook for economic activity and the labour market as nearly balanced but is monitoring developments abroad.”

In a press conference following the decision, Fed Chair Janet Yellen Fed said policy makers still expect to lift interest rates this year, which could come as early as October.

"Speculation will now shift to December as the next most likely month for US rates to start rising,” Chris Williamson, chief economist at Markit in London, told Reuters. "The 'data dependent' Fed will want to see further robust non-farm payroll growth between now and then as well as indications that the pace of economic growth is not wilting under the pressure of China's slowdown."

Indeed, futures traders are pricing in a 21 percent probability the central bank increases it target range in October as of about 3 pm in New York, a 49.5 percent chance by the December meeting and a 56.5 percent likelihood by January, according to Bloomberg.

In New York trading at about 3pm, the Dow Jones industrial average climbed 0.9 percent, the Standard & Poor’s 500 Index gained 0.7 percent, while the Nasdaq Composite Index added 0.9 percent.

Gains in shares of UnitedHealth and those of Boeing, last up 3.2 percent and 2.1 percent, led the Dow higher.

"I can't say it was a major surprise that the Fed did not move. I am a little surprised at the dovishness of the statement," Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, told Reuters.

"I would have expected a 'no move' to be accompanied by a slightly more upbeat assessment of the economy,” Esiner noted. “Instead, what we got was more focus on macroeconomic uncertainties, and that was a little bit of surprise.”

US Treasuries rose, pushing yields on the two-year note yield eight basis points lower to 0.73 percent.

“This is an ultra-dovish statement,”Thomas di Galoma, head of fixed income rates and credit at ED&F Man Capital Markets in New York, told Bloomberg. “People thought if they weren’t going to raise rates this time, they would come out with a hawkish statement, and they didn’t do that at all. If anything, they came out with the contrary statement that was uber-dovish, that they were worried about the international situation.”

The US dollar weakened, recently trading 0.9 percent lower against the euro.

Meanwhile, a Labor Department report showed initial claims for state unemployment benefits fell 11,000 to a seasonally adjusted 264,000 for the week ended September 12, while a Commerce Department report showed housing starts slid 3 percent to a seasonally adjusted annual rate of 1.13 million units in August.

In Europe, where stock markets closed before the Fed decision was announced, the Stoxx 600 Index ended the day with a 0.2 percent decline from the previous close. The UK’s FTSE 100 Index retreated 0.7 percent. Germany’s DAX Index eked out a 0.02 percent gain, while France’s CAC 40 Index rose 0.2 percent.

BusinessDesk.co.nz

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