Expectation of American interest rate rises fall after dovish Fed statement
Experts have slashed their expectation of an increase in American interest rates in 2017 after the Federal Reserve appeared to soften its position.
A statement from the Fed suggested it would be shrinking its balance sheet as early as its next meeting on 19-20 September, even though inflation in the US was softer than expected. This means markets are less concerned about the two or three predicted interest rate rises this year.
The comments suggested the Fed was now ready to unwind investments it made during the global financial crisis. This includes trillions of dollars of treasuries and mortgage-backed securities. Until now, it has retained these assets so that the money they earned as they matured could be pushed back into the economy as an economic stimulus.
Markets React To News
The comments from the Fed’s chief, Janet Yellen, saw the S&P500 jump to a record high. Comments from the dovish head of the financial giant are generally well-considered. She previously stated any adjustments to Fed policy would be pragmatic and not “data-driven”.
Live Chart S&P 500
Contracts being traded in July for the end of the year now put the risk of an interest rate rise at 40%. This was pitched at 60% at the beginning of the summer.
The Fed’s statement also said that job gains in the US had proven solid and business investment had grown alongside household spending. In combination, this is likely to put the Fed in a confident position going towards the end of the year.
Inflation Under 2% Target
At its last meeting, the body stated it believed price pressures were under the 2% inflation target. This, in turn, means experts believe it is unlikely to take a hawkish turn in its approach. As some evidence of this, the Fed’s policy committee did choose to retain the interest rate of around 1% at its last session.
Yellen’s comments also brought a small bounce for the dollar in European trading. The currency has been under pressure in recent months due to the furore around US President Donald Trump’s potential involvement with Russia. This has fuelled worries he is not in a good place to push through his highly market-friendly economic agenda.