US Federal Reserve keeps interest rates unchanged and sets October date for balance sheet reduction
Dollar lifts against pound on Fed announcement, with sterling down 0.7pc against the greenback and the euro down 0.9pc against the dollar
Dow and S&P close at record highs
European stock indices finish stuck in flat territory ahead of crucial Fed meeting; Spanish stocks sold off on Catalonia chaos
Dow, S&P close at record highs after Fed announcement
Expectations that there will be another interest rate rise by the Fed this year caused indices to close at record highs in US, despite the central bank deciding against a rate hike in the September announcement.
The S&P 500 closed up 1.59 points, or 0.06pc, while the Dow closed up 41.79 points, or 0.19pc.
The Nasdaq, meanwhile, was hit by a late confirmation from Apple that there was a wireless connection problem with its new smartwatch, and closed down 5.28 points, or 0.08pc.
Next few months of inflation data ‘crucial’
James Bohnaker, associate director of US Economics at IHS Markit, said the coming months are likely to be crucial in whether the Fed will continue with its timetable for rate rises and balance sheet reduction.
Underlying the Fed’s consensus decisions to leave rates unchanged and begin balance sheet reduction is a growing debate on whether inflation is in fact moving toward the 2pc target. There are plausible arguments on both sides, but the majority of FOMC members believe that inflation will gradually firm once temporary affects fade away.
That said, there is growing disagreement on the issue and the next few months of inflation data will be crucial in swaying the balance of thinking within the Fed.
The Fed in its statement, released prior to the Yellen press conference, had said: “Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.”
One more rate hike set for this year
Wall Street largely had a subdued response to the Fed announcement, with both the interest rate and balance sheet updates mostly expected. However, Capital Economics’ Andrew Hunter said there was one surprise:
The Fed’s decision today to keep interest rates unchanged at 1.0-1.25%, as well as its long-anticipated move to formally announce the start of its balance sheet normalisation process next month, came as little surprise. The bigger news was that, despite the weakness of core inflation in recent months, Fed officials continue to project one more 25bp rate hike by year-end.
Prior to the announcement, consensus had been split 50:50 over whether the Fed would be raising rates once again this year, but now it once again looks likely there will be a December hike, according to Hunter.
We had suspected that the recent softness of core inflation could persuade officials to hold off on the next rate hike until next year but, given these latest projections and the broadly unchanged language on inflation in today’s policy statement, we now expect the Fed to push on and raise rates again in December
Dollar pushed higher on signs of further Fed rate rises
Naeem Aslam, chief market analyst at ThinkMarkets UK, says the rise in the dollar is thanks to signs of further rate rises in the coming years:
The dollar index has moved higher as markets have reacted to the decision that the Fed still thinks that more interest rate hikes are possible despite the fact that the size of the balance sheet will also be reduced.
Sterling was down 0.7pc against the dollar, while the euro was down 0.9pc against the greenback.
Meanwhile, although the Fed have chosen not to raise interest rates now, Kully Samra, UK managing dof Charles Schwab, said inflation could soon start to drive higher, and cause the Fed to act ‘more aggressively’ on interest rates than expected:
“The recent jump in consumer price inflation was not enough to prompt even hawkish Fed officials to raise rates. Inflation over the past few months has fallen short of expectations and may be being subdued by larger economic factors. The Federal Reserve has been playing its own internal cat and mouse game with some officials citing low inflation as a reason to delay further tightening; while others want to stay on the steady path toward normalisation, due to the tightening labour market. Given the tightness of both the labour and housing markets, inflation could begin to surprise on the upside, perhaps pushing the Fed to act more aggressively than the consensus anticipates.”
Fed to start shrinking balance sheet in October, leaves interest rates unchanged
The US Federal Reserve has said it will leave interest rates unchanged, as expected, and said it plans to start shrinking its multi-trillion dollar balance sheet balance sheet in October.
The Federal Open Market Committee will release their economic forecasts and a policy statement, as well as a dot plot to show expectations on future rate rises
Janet Yellen will give a press conference on the statement. This is likely to last around an hour
Opinion split on whether Fed will hike rates again this year
While the Fed is not expected to raise interest rates in today’s announcement, it had previously been thought that there would be one further hike in 2017.
However doubts have been mounting over whether the Federal Reserve would be able to stick to its timetable for further interest rate rises amid sluggish jobs growth in the US and persistently weak inflation.
Ahead of the meeting today, consensus on a further rate rise looks split down the middle.
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