Fed Disappoints, Keeps Policy on Hold
The Federal Reserve announced Wednesday at its policy meeting that it has decided to keep rates unchanged at 0-0.25 percent. The Fed cited lower inflation pressures and slow employment growth as reasons for keeping policy extremely accommodative. Further, the Fed reiterated its promise that it would keep rates on hold through late-2014, against expectations of those who thought that the Fed would extend this to mid-2015.
The Fed noted in its post-meeting communique that inflation and employment remain weak and are trending below target. This could signal that the Fed may be closer to acting as inflation continues to slow. Recall that quantitative easing is a policy response to deflationary risks, so further slowing in inflation could signal Fed action.
Markets generally shifted to a more risk-off tone on the news of the Fed's inaction. The S&P 500 moved lower on the news, losing approximately 0.5 percent. Gold bounced lower on the release of the statement, and the EUR/USD edged lower by about 50 pips. Treasuries moved higher with yields falling and oil remained strong. Financial companies, as measured by the Financial Sector SPDR (NYSE: XLF), also slipped on the news.
The comments from the Fed paint a continued negative picture for the U.S. economy. Looking at the Fed's forecasts, the Fed did not make any changes, as expected. The Fed only changes forecasts quarterly, and so revised expectations are expected at the September meeting.
Markets now await the decision from the Bank of England and the European Central Bank early Thursday. The Bank of England is expected to report its interest rate decision at 7:00 am ET and the European Central Bank at 7:45 am. Following the dismal PMI numbers earlier Wednesday from the U.K. and the bleak GDP report the week earlier, eyes will be on the BoE for action. Also, following ECB President Mario Draghi's comments last week, markets are anticipating further action from Brussels.
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