Though there were nerves leading up to the release of the Fed statement at the end of the FOMC meeting yesterday afternoon, the wording of the statement gave little away as to when to expect a rate hike.
By Peter Martin
Thursday, June 18, 2015
If the market was expecting the foundations to be laid for a rate move in September in this meeting’s statement, no such thing was present. In fact, lower GDP growth forecasts for 2015 from the Fed would seem to point to such a move being further away than previously thought, while in her post-meeting press conference Fed chief Janet Yellen urged market participants to focus more on the entire expected trajectory of monetary policy rather than paying too much attention to the timing of the first rate increase.
The Fed statement makes it clear that in order for rates to be raised there needs to be further improvement in the jobs market and the FOMC needs to be confident that inflation will move back to target in the medium term.
New reports for both these areas were released on Thursday. Lower jobless claims shows that the labor market does indeed continue to improve: initial claims fell 12,000 last week to 267,000, which helped pull the four-week moving average down from 278,750 in the week prior to 276,750. Last week was the sample week for the June employment situation report, and the historically low level of jobless claims suggests we can expect a positive outcome.
On the inflation front, prices moved higher in May at the headline level, but mostly due to energy prices recovering, a development that was not unexpected. CPI rose 0.4% last month, after a 0.1% increase in April. This still leaves the year-on-year change hugely below target at 0% (the Fed wants to see an annual inflation rate of 2%). At the core level, price rises appear to be slowing, with the core CPI rising just 0.1% in May after a 0.3% increase in April. Based on this evidence, the Fed will be hard pressed to say it is confident in inflation moving back to target and it will likely take a sequence of consecutive months of building price pressures before the Fed can make a move to normalize policy.
On the Greek front, there have been no fresh developments, which is not a good sign given the imminence of its IMF repayment deadline. IMF chief Christine Lagarde said today that there is no grace period if the payment is not made by July 1. Her comments come as eurozone ministers meet in Luxembourg today in an attempt to hammer out a reforms-for-aid deal, but expectations are not high for any agreement being reached. Given the solid performance of the stock market today, it may well be that a Greek default is already largely priced in — stock indices on Wall Street have opened in positive territory, despite an earnings-led decline in tech bellwether Oracle ($ORCL). Shortly after the open in New York, the Dow Jones was 95 points or 0.53% higher at 18,030, while the S&P 500 Index rose 0.57% to 2112.0.
Oracle reported quarterly earnings of 78 cents per share, substantially lower than expected. Shares in the company, which is a constituent of the S&P 500 Index, were more than 8% lower in early trading.
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