FOMC Leaves the Fed Funds Rate Unchanged at 2%, With an Upside Bias
- The FOMC kept the fed funds rate at 2%.
- The statement was somewhat hawkish and highlighted the rising upside risks to inflation.
- As before, Dallas Fed President Fisher dissented, preferring an increase in the target rate.
As was widely expected by financial markets, the FOMC left the federal funds rate target unchanged at 2%, bringing its rate cutting cycle (dating back to September last year) to an end. In doing so, the Fed stated that the 325 bps in monetary policy easing was sufficient to "help promote moderate growth over time." The decision, however, was not unanimous, with Dallas Fed President Fisher dissenting for the third consecutive time, preferring an increase in the policy rate.
Since this outcome was widely expected by the markets, the focus of attention was on the wording of the accompanying communiqué, and in this regard it is apparent that the Fed has shifted to a more hawkish stance. However, there is no indication in the Statement that the Fed will hike rates in the near term, though they noted (as usual) that the FOMC will "monitor economic and financial developments and act as needed".
In terms of inflation, the Fed repeats its previous statement that it expects inflation to moderate later this year, though the uncertainty to the inflation outlook remains high. It goes on to add that "the upside risks to inflation and inflation expectations have increased", in contrast to its April statement that stated that "some indicators of inflation expectation have risen."
On the financial sector, the FOMC maintained its concern about the growing distress in the financial sector by noting that financial market remains under considerable stress - as it did in April. And in terms of the economy, it explicitly noted that the downside risks to growth have "diminished somewhat", and there was no mention of the economy being weak. Instead, it claimed that "the recent information indicates that the overall economic activity continues to expand."
Overall, the tone of the report suggests that the Fed is likely to keep the policy rate steady in the near to medium terms as it assess the incoming data over the coming month, though it now appears to possess an upside bias to the balance of risks. We believe that the Fed may continue to talk tough in an effort to shore-up the dollar, but do not see them actually hiking rates in the near-term.
TD Bank Financial Group
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.
|
