Back in July Australian financial markets were on hold as they waited for June quarter CPI figures and the FOMC July meeting. Now it is September and a similar period of waiting has just ended, this time for the BoJ policy decision and for the results of the FOMC September meeting. The BoJ meeting was important; the Japanese economy is one of the largest in the world. Once the BoJ meeting was out of the way, with not much in the way of policy change there, focus quickly turned to the FOMC.
Prior to the FOMC meeting the odds of a rise, based on 30-Day Fed Fund futures prices, were a relatively slim 18%, so not much weight was placed on a change occurring. Markets were more interested in the statement released after the meeting which would give a clues as to the likelihood of a December increase, given November is all but ruled out because of the presidential election.
The predictable result was of no increase. US yields fell after the meeting with 10 year yields 4bps lower at 1.65%, 30 year yields 6bps lower at 2.38% while the USD fell against the euro and the yen. Economists got to work analysing the accompanying statement and their varied views are indicative of the lack of clarity the FOMC is providing to markets but US cash markets place a near 60% chance of a December rate rise.
Westpac’s Elliot Clarke pointed out how November was a non-starter and the focus was on December. ”While the politics of November are likely to prove too difficult, a December rate hike is clearly in view. Two more will follow in 2017, but thereafter further action will prove extremely difficult.” ANZ Research agreed and said, ”One hike this year continues to be implied and the tone of the commentary regarding the economic outlook was slightly more upbeat.” NAB’s David DeGaris pointed to the wriggle room the FOMC had given itself. “Fed Chair Yellen at her press conference rate acknowledged the case was stronger for an increase in the target rate at this meeting but that it was reasonable to wait to see more progress towards its objective…She would not be specific on dates, but it seems she is setting the market up for the likelihood of a December hike, subject to a still growing economy, stable markets and overseas developments.”