Markets

Fed to be "patient" with rate changes

Fed to be

This has now gone by the board.

Federal Reserve Chairman Jerome Powell came back to that word several times when he spoke yesterday about the Fed's decision to hold off on raising its key interest rate. Investing, trading and speculation in any financial markets may involve high risk of loss.

Following this announcement, the Dow Jones Industrial Average rose more than 400 points.

Stock-index futures pointed to a mixed start for Wall Street on Thursday. "There's everything for the doves today".

Watch the Fed's Press Conference Wednesday

Continued U.S. economic growth was still "the likeliest outcome", Powell said, but was now less certain than a month ago when the Fed said the economy was just as likely to grow faster than expected as it was to face a sharp downturn. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier past year. There are a number of indicators suggesting the economy is starting to slow down, particularly the housing market.

Charlie McElligott, cross-asset macro strategist at Nomura, said the Fed "utterly "bent the knee" to the stock market".

The federal funds rate is also tied to most revolving lines of credit, including home equity lines and auto loans. The Fed in their accompanying statement has implored that because of recent developments in global economic and financial conditions, they "will be patient" in adjusting monetary policy.

Powell said the policy change was not driven by a "major shift" in the Fed's baseline assessment for the U.S. economy. These were accumulated under the "quantitative easing" policy, when the central bank was a major purchaser of bonds.

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But in a separate statement, it said it had made a decision to continue managing policy with a system of "ample" reserves, reinforcing the notion the rundown may end sooner than expected.

The Fed said it could adjust the pace of the sell-off if the economy deteriorates. And better yet - this is what market-bulls were hoping they'd hear - the Fed explicitly stated it's open to adjusting the timeline for its "balance sheet normalisation". The Fed and many economists outside the administration have long felt Trump's tax and spending policies would provide the economy a short-term boost, or a "sugar rush", that would wane. Current estimates are that they could remain above $3 trillion.

If the Fed chooses to reduce its holdings less than many expect, that would result in lower long-term rates.

German retail sales fell at the fastest rate in 11 years, British auto production posted its biggest drop since 2009 and euro zone growth was the slowest in four years.

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The "decision will reinforce expectations that the Fed is nearly done raising interest rates", Michael Pearce, senior USA economist, Capital Economics, said in a research note.

The benchmark S&P 500 posted its biggest monthly percentage gain, at 7.89 percent, since October 2015 as USA equities continued to surge from their late 2018 swoon.

The head of macroeconomic research at AXA Investment Managers, Laurent Clavel, told the Wall Street Journal: "The slightest shock would send France into recession".

The first two reasons suggest that central bankers will not be overly eager to try to break their dependency on markets, at least any time soon.

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Powell argued that the decision is linked to a slowdown to the global economy and signalled greater flexibility to the U.S. bond-buying stimulus program. "With the economy poised to slow over the next year, the Fed is not interested in risking turning that slowdown into a recession".



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