US interest rates look like rising next month after the US Federal Reserve left then unchanged at this week’s two day meeting, but made it clear it saw the sluggishness in US economic activity in the first quarter as “transitory”.
Investors took the use of the word (yes, just one word) to mean the US central bank believes the economy will recover quickly from the slowdown which saw jobs growth slow a little, GDP growth slump to an annual rate of .7%, from 2.1% in the 4th quarter and 3.5% in the third quarter of 2016.
The final clincher will be the US jobs data tomorrow night for April – if there is a repeat of the low 98,000 figure for March, then the Fed won’t move on rates, but will sit.
If the number of new jobs hits for the forecast 170,000 plus then a rate increase can be expected in six weeks time, at the next Fed meeting on June 13 and 14.
The realisation that rates look very likely to rise next month saw a modest end to trading on Wall Street this morning. Gold fell sharply, the Dow rose 8 points, but the S&P 500 and the Nasdaq both dropped.
Our market will start lower with the overnight futures trading down 6 points.
After yesterday’s surprise 1% fall in the ASX 200 in what was the worst day’s trading for six weeks, the Wall Street will not make for a confident start, even though the likes of Facebook turned in better than expected March quarter figures.
Investors described the post meeting statement issued early this morning Sydney time as ‘bullish’ and pointed to the Fed’s commentary that US consumer spending continued to be solid, business investment had firmed and inflation has been “running close” to the Fed’s target.
“The committee views the slowing in growth during the first quarter as likely to be transitory," the Fed said in a unanimous statement.
“The labor market continued to strengthen even as growth in economic activity slowed and “The fundamentals underpinning the continued growth of consumption remained solid,” the Fed’s statement added.
The Fed lifted its key rate by a quarter percentage point at its last meeting in March to a target range of 0.75% to 1%.
Before this week’s meeting most Fed members, from chair Janet Yellen down, had made it clear that in contrast to previous years the central bank feels more confident in its forecast of two more rate increases in 2017.
The latest statement makes it clear the central bank remains optimistic on economic growth and that its rate rise plans (possibly two more this calendar year) remained intact
The Fed statement showed little concern about a recent softening in inflation, describing it as “running close to the committee’s 2 percent longer-run objective."
The latest statement offered no more leads on when the Fed might announce when and it will begin shrinking its $US4.5 trillion balance sheet. That is a major pre-occupation of the markets because it will represent an additional tightening of monetary policy.
