Despite the US Fed talking tough on rates in 2016, at its latest meeting held this week, the FOMC left the federal funds rate target unchanged at 0.25% to 0.50%. No one really expected the US Fed to raise rates at its latest meeting; the odds implied by US cash markets for such a lift were around 5% just prior to the meeting. What has created also created some comment is the lowering of FOMC members’ projections for the path of interest rates in 2016 and 2017, known as the “dot plots” due to the way they are presented as dots on a chart.
Source: Bloomberg
Westpac said the lowering of FOMC members’ projections for the path of interest rates over the next two years “will increase doubts about a June move.” The dot plots now suggest two rates rises this year instead of the four previously expected, while federal funds futures now imply a 50% chance of a July interest rate increase.
Former ANZ chief economist Warren Hogan said the Fed’s latest dot plots “highlight how hard it is going to be to get global interest rates up” and he expects the US rate to remain below 1% in 2016. However, four 25bps increases are still currently expected by FOMC member in 2017.
Baillieu Holst said the FOMC did not want to risk a stronger US currency given the European and Japanese central banks’ fondness for negative interest rates that is driving their respective currencies lower. The broking firm views the FOMC decision as fallout from what has become known as the global currency wars and the desire of countries to have lower exchange rates in order to stimulate exports. The problem is countries can’t all have low exchange rates at the same time; a weakening one country’s exchange means a strengthening of another’s.
February CPI figures were released earlier in the day had sent yields higher until the dovish tone emanating from this latest meeting subdued or reversed the movements. 3 and 10 years yields fell to close the day at 0.86% and 1.93% respectively while the 30 year yield rose 1 basis point to finish at 2.73%.
