The US Federal Reserve sent a couple of signals to investors with its decision to leave rates steady at its latest meeting this week. The central bank and Chair, Jay Powell, ruled out – for the time being at least – a rate cut and a rate rise – which some excitable economists and analysts had been starting to push (the same here in Australia).
The Fed and Powell made it clear that this year's series of disappointing inflation readings will likely see US borrowing costs remaining higher for longer. But it also revealed plans to slow the pace of its quantitative tightening program, which was immediately seen as a slight easing in policy.
Powell said it was unlikely that the central bank’s next move will be a rate hike. “I think it’s unlikely that the next policy rate move will be a hike. I’d say it’s unlikely,” Powell told the post-meeting media briefing. Asked about what it would take to have a rate increase, Powell said, “I think we’d need to see persuasive evidence that our policy stance is not sufficiently restrictive to bring inflation sustainably down to 2% over time. That’s not what we think we’re seeing.”
That comment and changes in the post-meeting statement from the Fed saw Wall Street rally for a little while, but gains for the S&P 500 and Nasdaq turned to red by the close, and the Dow – which had surged 500 points after the Fed statement – was only up just over 87 points.
Investors might want the federal funds rate cut from its present 5.25% to 5.5% range, but if you can’t have that, then a negative on a rate rise will do just as well. The news saw the US dollar ease a touch, but the Aussie rallied through and well above 65 US cents to be up three-quarters of a percent for the session.
US bond yields were mixed – the key 10-year note saw the yield spike to around 4.64% just before the Fed statement was issued, fall to 4.59%, and rebound back to just over 4.64% – which worried equity investors. But the yield on the 2-year bond – the one that’s said to be more responsive to Fed policy moves in the short term – fell back under 5% to end around 4.97%.
Gold jumped more than $US23 an ounce to trade around $US2,330 an ounce shortly before 7 am Sydney time, but US oil futures fell under $US80 a barrel for a loss of more than 3% on the day after US oil stocks rose last week.
The late retracement by equities and bonds was probably more to do with Powell’s explanation of the Fed’s decision to slow the shrinking of its balance sheet. That’s been called ‘quantitative tightening’ (as opposed to the original, quantitative easing which involved expanding the size of the balance sheet). Investors first took the move to be positive – a move to slightly offset the maintaining of rates around 5.25% to 5.50% – but the Fed chair made it clear it was nothing like that.
At his media conference, he stressed that the move to slow the pace of reducing its balance sheet is not being done to provide accommodation to the economy or be less restrictive. “It really is to ensure that the process of shrinking the balance sheet down to where we want to get it is a smooth one and doesn’t wind up with financial market turmoil the way it did the last time we did this, and the only other time we’ve ever done this,” he said.
In other words, it is not a policy move, more one of the mechanics of the central bank’s monetary policy – but that should also be seen as a positive in that the Fed doesn’t want to damage confidence or undermine its policy.
