Published: Sat, February 02, 2019
Money | By Arnold Ball

Fed Changes Course, Signals Pause on Rate Hikes

Fed Changes Course, Signals Pause on Rate Hikes

The Federal Reserve's policy twist on Wednesday might seem just what the White House ordered, with a hold put on what President Donald Trump termed "loco" interest rate hikes, and an openness to ending the monthly runoff of up to $50 billion from the US central bank's balance sheet. That is especially so with global companies facing the impact of Trump's trade war with China and the higher tariffs on imports of steel and aluminium (which is hurting the very manufacturers Trump reckoned to help, such as Harley Davidson, Ford, the farm sector etc) and being hit by higher costs. Later in the afternoon we have the ISM Manufacturing PMI report.

Business and consumer confidence, and a drop in expectations for inflation, may be even more concerning to a central bank that views public psychology as an important influence on future economic outcomes.

The Federal Reserve left interest rate unchanged at 2.5 per cent in its first monetary policy meeting of the year. Short-term futures in fact show they remain convinced the US central bank's next move will be a rate cut rather than a hike. This time, it is widely anticipated and nearly 100% guaranteed that the FED will keep interest rates unchanged at 2.50%. We now think that this period has ended and expect renewed downside pressure.

"I'd say it was something of a curve ball in light of the most recent FOMC statement!".

But after the jobs data, traders reduced rate-cut bets, though they continue to bet against a rate hike.

The Australian dollar, often considered a barometer for global risk appetite, falls against the USA dollar as factory activity in China last month shrank by the most in three years.

Although European markets opened higher, stock fell as banks reported poor earnings. But the Fed now thinks it has started the new year in a lower gear and doesn't need another rate increase. It was struggling near a three-week trough against its major peers and emerging market currencies rose nearly in unison having been steamrollered by the greenback previous year.

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Powell also mentioned that the FED might not keep up the pace of rate hikes that we have seen in the last two years.

Stocks have benefited this week from the U.S. Federal Reserve, which all but abandoned plans for raising interest rates again, and on optimism that a U.S. "The bar for hiking rates even once in 2019 is extremely high".

These results come two days after the Fed signaled it may pause hiking interest rates because of softness in the economy and financial market volatility.

Analysts say a comprehensive trade deal between the world's two largest economies would most likely boost risk sentiment and lead to a weaker United States dollar. Non-farm employment had missed expectations in November, increasing by only 155k against 198k expected.

Market watchers were surprised by the Fed's latest signals on its balance-sheet unwind, which suggests the central bank is closer to completion than previously expected. That was nearly twice of the number expected. Sure - the rally in risk assets may represent an offsetting force for yen appreciation, but we believe that the downside pressure on USA yields will more than counterbalance this: correlations between USDJPY and risk assets (MSCI World Equity Index) have been falling recently, while those between the currency pair and U.S. yields have remained exceptionally high. "But near term, Dollars should remain on the back foot".

But, that was partly due to the fact that the participation rate had also increased by two points that same month.

The economist likens the situation to that of the cycle in 2004-6 when the Fed hiked interest rates 17 times to a high of 5.0%, and although he does not expect interest rates to rise as high as that in this cycle, the pattern will probably be similar. The unemployment rate is expected to tick lower to 3.8% this time, which is the number for January.

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