Written by Kathy Lien, Chief Strategist
The Federal Reserve is getting ready to raise interest rates but a rate hike is not imminent. For the first time since August, the central bank has left rates unchanged at 2 percent. Although the FOMC statement is hawkish, the US dollar has failed to react because currency traders were looking for more. They wanted reassurance that a rate hike was around the corner, but what they got was the minimum that dollar bulls were looking for. It wasn’t enough to send the dollar higher or to take it dramatically lower.
The central bank hopes that slower growth will ease inflationary pressures, but if that does not happen by the August 5th FOMC meeting, they will have to raise rates in September. Between now and then, there are 2 non-farm payroll reports and multiple inflation reports due for release, giving us a much better sense of how bad the US economy is faring and whether consumers and businesses can handle an interest rate hike.
As much as Fed officials will hate to admit it, oil is currently determining Fed policy. If they want to take inflation into their own hands, what they need to do is to raise interest rates, which will strengthen the dollar and weaken oil prices.
The biggest change in the statement is the line that says that “Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased.” In other words the risks to growth and inflation are no longer balanced – the scales are tilting in favor inflation.
The decision is leave rates unchanged was also not unanimous – one member, Richard Fisher voted in favor of a rate hike.
This officially draws a close to the Fed’s easing cycle and puts the central bank one step closer to raising rates. Given the tone of today’s FOMC statement, I expect the Fed to raise interest rates in September.
Having brought interest rates from 5.25 percent all the way down to 2.00 percent, the Federal Reserve does not have room to cut interest rates in the current inflation environment. It would take at least two consecutive months of negative retail sales growth and back to back job losses in excess of 100k before the Fed would lower interest rates again.
If the ECB raises rates in July and the Fed does not reassure the markets that a rate hike is coming as well, the US dollar could continue to give back its gains. However in the longer term, the US dollar has bottomed out alongside US interest rates and it will only a matter of time before it begins to trend higher once again.
Comparing the FOMC statements **New Language Highlighted
June 25, 2008
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.
Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.
The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.
The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.
April 30, 2008
The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent.
Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.
Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.
The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred no change in the target for the federal funds rate at this meeting.
In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 2-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York,
Sources By Kathy Lien, Chief Strategist of DailyFX.com
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