FED MONETARY STATEMENT - STATUS QUO CONTINUES
By Ruma Dubey
No Press Conference. No economic projections. Just an issue of monetary statement, leaving it to the world to read between the lines and make its own conjectures. That in nutshell was what today’s Fed statement was all about – nothing different from the June one.
As expected by all, there was no exact timeline given and no explicit signal was given; this too was on expected lines as Yellen has time and again reiterated that Fed’s decision to hike or not to hike will depend on incoming data, meeting to meeting. So why were so many expectations riding high on this meet tonight? Well, simply because July comes before September – the next meet is scheduled for 18-19th Sept and that would be a more crucial meet when we could either see a rate hike or get an indication of whether or not it will come in 2015 at all.
Yellen had made it very clear that the Fed wanted to see more improvement in employment numbers and though the labour market data has been upbeat, it was nowhere near the “maximum employment” objective and that itself signaled that we could be looking later than earlier.
So at the end of the meet tonight, we still continue with the same expectation – maybe rates could go up in September or later in December. But looking at the language of the Fed when it voiced concerns over inflation, “Inflation continued to run below the Committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports;” it looks like we should be looking at December and not September.
Take a quick look at the highlights of the statement:
- The Committee seeks to foster maximum employment and price stability.
- Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate.
- To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.
- In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation.
- The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
- The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
After all this brouhaha about this rate hike, what comes to mind is one question – rate hike HAS to come in and it could be as token as 0.25%. So are we worrying about a potential quarter percent increase? Does this mean that our economies are so weak that we cannot handle a 0.25% hike? What does this mean – there is no confidence in the economy and a quarter percent hike could bring down the world? Are we all a pack of cards?
Surely not! This uncertainty and “protectionism” of US has more or less been discounted by the markets, especially India. We are surely strong enough to take in a quarter percent rate hike in US. It’s not an overnight occurrence and we have been preparing for this from the beginning of the year. And the most significant point – India is a compelling story today, especially now with the turmoil in Chinese markets. So what are we worrying about?
The markets will go about with its business as usual and corporate results will dictate the moods. The RBI meet is scheduled for 4th August, 2015. And that is where all the focus will now shift. So till 19th September, let’s give Yellen a break.