FOMC MEET - AS EXPECTED, QUIET WITH NO SURPRISES
By Ruma Dubey
It was as expected – a quiet Federal Reserve meet chaired by Janet Yellen. There was anticipation that she might announce a timeline for a rate hike next year but obviously, Yellen wanted to avoid making any hawkish statements which might ruffle not just US markets but world over.
Wanting to avoid volatility as this juncture, the Fed was patient this time, saving tough language for the next meeting scheduled on 16-17 September. That will be a crucial meeting as that is time when the Fed will give updates on its economic forecasts and will also hold a press conference. Thus as expected, it was a quiet meet, with the statement changed to only reflect the recent economic data.
Again, as expected, the monthly pace of reducing bond purchases was kept intact and it was down by another $10 billion to now $25 billion. This sends out a signal that the QE3 will most likely end in October.
Earlier during the day, the data on the US economy was gratifying. During the second quarter ended 30th June 2014, the US economy bounced back as the fastest pace since last fall. Egged on by consumer spending, that on big items like trucks and cars, the GDP for Q2 grew 4%, much ahead of what most analysts had estimated at around 3-3.2%. This growth reiterates the fact that Q1 growth had contracted mainly due to a harsh winter and fall in healthcare spending on account of Obamacare. Consumer spending rose 2.5% v/s 1.2% in Q1.
On the other hand, inflation rose to the highest annual rate in three years at 2.3% v/s 1.4% in Q1. The core PCE that excludes food and energy climbed at a 2%, up from 1.2%. Now this is the worrying part – the Fed wants to see inflation in the range of 2 to 2.5%, and anything higher or lower was considered to be harmful. This raised fears that the Fed might be forced to hike rates sooner than expected. But in today’s statement, the Fed seemed to suggest ‘later than sooner’ for a rate hike as it feels that this rise in inflation was on account of temporary factors and this is expected to ease out soon. Thus in all aspects, the September Fed meet is more crucial.
How will the Indian markets react to this? Positively on two counts – nothing untoward from Yellen and the robust 4% growth rate of USA for Q2. Spirits are expected to be buoyed and eventually, earnings could take over. Important results to watch – ICICI Bank, HDIL, HCC, Maruti Suzuki, NTPC, Tech Mahindra and many more.
Highlights of FOMC statement:
- Slack in the labor market persists even as the economy is picking up.
- Likelihood of inflation running persistently below 2 percent has diminished somewhat.
- Tapered monthly bond buying to $25 billion for 6th consecutive $10-billion cut - $15 billion in Treasuries and $10 billion in mortgage-backed securities; staying on pace to end the purchase program in October.
- In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation.
- 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.