Most market participants were not surprised by yesterday’s Federal Reserve decision, whereby once again it maintained its current fund rate within the range of 0.25 per cent to 0.5 per cent. The only surprise was the omission of few words which previously featured within the latest statements issued by the Fed.

As said a hike was completely off the table, with the market pricing the probability of a hike at 0.00 per cent over the past days, while pricing a circa 21 per cent probability of a hike in the next meeting. The omitted previous language was ‘global economic and financial developments continue to pose risks’.

Previously such tone was continuously being highlighted in all statements by the Fed, in which to my understanding such tone was based on the fact that the Fed was unwilling to act in isolation in terms of monetary tightening. The main issue is surely the fact that a hike would probably imply an appreciation in the dollar, which in turn might hinder the path of economic recovery.

The slightly more hawkish to dovish tone when considering the omission of the previously mentioned language are in line with the noted growth in real income which has maintained a solid upward trend since the plunge way back in 2013, while consumer sentiment remains high. In addition, the other noted strengths in the labor market continued their pace.

Furthermore, one of the major gauges of the Fed in terms of monetary decisions, inflation, has continued to run below the FOMC expectations of 2 per cent. In fact, over the past three months inflation has trended lower from 1.4 per cent in January to 0.9 per cent in March.

In line with the March meeting, from the 10 voting members the dissenter this time round was Esther L. George president of the Kansas City Fed, which dissented for the second meeting in a row and expressed her view in favour of a raise in the target range for the federal funds rate to 0.5 per cent to 0.75 per cent.

Looking at yesterday’s GDP figures some softness from expectations was noted with annualised quarter on quarter GDP at 0.5 per cent, slightly shy from the expectations of 0.7 per cent and the lowest figure since quarter two 2014.

Undoubtedly, despite positive numbers, yesterday’s softness was the consecutive third decline from the highs of 3.9 per cent recorded in the second quarter of 2015.Personal consumption remained solid with actual data standing at 1.9 per cent just shy of the 1.7 per cent being estimated.   

On the flip-side, personal consumption core price index, which measures the prices paid by consumers for goods and services, increased to 2.1 per cent from the prior figure of 1.3 per cent. In my view, following the re-worded stance by the Fed, a rate hike this year round is definitely on the table.

As at this morning, the market is pricing the probability of a hike for the next Fed meeting at lows of 12 per cent, however the probability of a hike for the other Fed meetings in 2016 has increased, with undoubtedly the highest being noted at December’s meeting with a probability of a hike at 59 per cent.

Clearly, the current low rates are harming the banking sector, with the latest set of results of major US banks showing the remarkable softness at top line levels.

Disclaimer: This article was issued by Jordan Portelli, Junior Investment Management at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

 

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