Unlike the lead-up to the March meeting of the U.S. Fed’s FOMC, markets were quite confident the federal funds rate would not be lifted at the May meeting. Prices in the futures market for cash consistently implied traders thought there was a less than 10% probability of a rate rise and any such event would be more likely at the FOMC June meeting.
As it turned out, the FOMC did not change the federal funds rate from its current target band of 0.75% to 1.00%. However, it won’t be long before it does. “Inflation measured on a 12-month basis recently has been running close to the Committee’s 2% longer-run objective.” The U.S. unemployment rate was at 4.5% at the end of March and raising rates is all about recovering the official interest rate back to normal levels from the emergency levels it plunged to in order to avoid the Great Recession turning into the Great Depression 2.0.
Commentators and economists seemed to focus on the more hawkish tone of the statement. Bond and currency markets had been expecting such a tone with the May decision and when it was not there, the US currency weakened against other currencies and bond yields fell. This time around both 2 year and 10 year bond yields each rose 3bps to 1.29% and 2.32% respectively and the US dollar rose against other currencies.
ANZ Research described the FOMC as “confident in the economic outlook”, something ANZ suggest the “dot plots” are worth relying on. CBA fixed income strategist Philip Brown reached a similar conclusion. “In light of the overall upbeat assessment, the Fed is likely to continue its approach of gradually raising Fed Funds rates. We continue to forecast two hikes through the remainder of the year, one each in June and September.”