The Fed's Rate Hike: Substance and Style

The Fed's Rate Hike: Substance and Style

Chairman Powell's FOMC was brief, clear and optimistic; trade relations between the U.S. and China remained challenging; Europe's central bank shared its playbook for the next year and more; Russia and Saudi Arabia met about oil and more.


“Various factors have deteriorated my credibility as president of the central bank”
Frederico Sturzenegger, resigning as head of Argentina’s central bank in the wake of the rout of the Argentine peso.

Fed Rate Hike: Substance and Style Chairman Powell’s post-meeting press releases are both informative and brief, with a focus on the intentions of the FOMC as well as its actions. The all-but-guaranteed two rate hikes for the rest of 2018 were clearly described as a minor adjustment due to economic strength, and a welcome move toward a more economically neutral rate than has been in place since the 2007 Global Financial Crisis.

Financial markets seemed to get the message; the carefully-scrutinized yield for 10-year U.S. Treasuries spiked briefly to 3.0069%, but has been headed downward since then, suggesting a slightly reduced fear of inflation – at least over the ten-year time frame. As of 11:07 AM on Friday, June 15, the indicated yield was 2.9022%. The 5-year 5-year break-even inflation rate remained at roughly 2.1%, staying well within its 2.25% to 1.95% trading range, where it has been since mid-January 2018.

The Fed’s continued efforts to reduce its balance sheet were also mentioned. In that vein, the FOMC’s slight adjustment of the interest it pays its member banks to leave deposits with the Fed (now at 1.95%) may have been intended to encourage depositors to seek better returns outside the Fed’s own balance sheet.

Meanwhile China’s central bank decided to leave its benchmark rate unchanged as a means of continuing its support of the economy, rather than following U.S. rates higher.
 

China-U.S. Trade: More Confrontation Friday saw the White House release a list of hundreds of additional proposed items for its proposed $50 billion in increased tariffs on China. These wouldn’t take effect immediately; they are subject to the same review and approval process as the previous, shorter list. China’s Ministry of Commerce responded immediately with a tariff proposal of its own, along with a restatement of its policy favoring free trade.


Europe’s Economy: ECB Declares Gradual Victory
In light of the current weakness in Europe’s economy in Q2, a continued policy of accommodation was welcome. But unusually, the ECB’s monthly press conference featured President Mario Draghi as a model of clarity and specificity. A gradual end to its ultra-accommodative bond-buying program has been scheduled; €45 billion, the current level, for September, then a €15 billion reduction each month in October, November and December 2018.

Interest rates would remain at their current levels at least through the summer of 2019, or longer if needed. Debt remaining on the ECB’s balance sheet would continue to be reinvested “for an extended period” after the end of December 2018.

 

Global Oil: The Meetings Will Continue Until… In advance of the upcoming OPEC meeting this coming Friday, Saudi Oil Minister Khalid Al-Falih met with his Russian counterpart in the shadow of the Saudi-Russian World Cup match between their nations’ teams – as did Russian  President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman. Minister Al-Falih stated that a decision to increase OPEC and allied production was “inevitable”. On the other hand, he also said he expected Saudi Arabia to win the match in a “very tight game”, which the Russian team won 5-0.

 


All data Source: Bloomberg, on their specified dates and times.
 

Definition:

The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System (the Fed) responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

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