Yesterday, the Fed concluded its three-day monetary policy committee (MPC) meeting. At 1900 (GMT), they released their assessment of the economy and their interest rates decision. In this meeting, as expected, the officials left interest rates unchanged and while their statement was also as expected, it sounded more optimistic than the traders had expected. As shown below, the dollar jumped against the basket of currencies that make up the dollar index. This was mainly because the Fed’s statement this time was much stronger than the last one. This was a signal that the Fed will continue with its previously guided two interest rate hikes this year.
Among the key statements from the Fed was an emphasis on the strong growth and the rate of inflation which is nearing the 2% target. The Fed said:
‘The FOMC expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labour market conditions, and inflation near the committee’s symmetric 2% target over the medium term’.
After the last meeting, the government data has continued to show a strengthening economy. For example, the second quarter GDP numbers released a week ago showed that the economy expanded by 4.1% in the second quarter. This was the biggest rate of expansion since 2014. The growth was attributed to strong corporate earnings, fixed asset investment, and strong consumer spending. Experts expect the GDP to remain strong in the third quarter although the growth will start slowing in the coming year.
Another key number released after the previous Fed meeting was the private payrolls numbers released yesterday. The data from ADP showed that the economy had added more than 219K private payrolls in July, which was higher than the 180K expected. This was a positive number for the economy although the official government data could be different.
On a disappointing note, after the previous meeting, the housing and construction numbers have continued to disappoint. The vehicle sales are expected to fall as the effects of the trade war continues. In addition, the US has threatened tariffs of Chinese goods worth more than $200 billion as the negotiations with the European Union are underway. Further, the president has threatened a government shut down if he doesn’t get the funding for his wall. This shut down will likely go to an extended period of time because the democrats won’t cooperate with the republicans.
In addition, the president has criticized the Fed for interest rates hikes. The statement released yesterday – and the lack of the press conference – did not show the response from the Fed. These details could emerge in the minutes of the meeting.
The meeting came after the Bank of Japan decided to leave rates unchanged. It signalled that the status quo will remain for a long time. The ECB has expressed the desire to hike in 2019 while the Bank of England is expected to hike in the today’s meeting.