Tag Archives: Interest Rates

More cautious Fed holds rates steady, now sees only two rate hikes this year

WASHINGTON (Reuters) – The Federal Reserve has reached a virtual consensus to raise interest rates twice during the remainder of the year as the U.S. economy continues to muster strong job growth despite global weakness.

Fresh policy and economic projections from Fed officials on Wednesday showed a clear majority expect two quarter-point hikes by the end of 2016, absent a major shock to the economy or job market, while 12 of seventeen expect either two or three hikes.

In keeping its key overnight interest rate unchanged in the current range of 0.25 percent to 0.50 percent, the Fed balanced what it described as “strong job gains” against the fact that “global economic and financial developments continue to pose risks.”

But the clustering of opinion among Fed policymakers, which represented a sharp narrowing of rate projections since the last round of forecasts in December, shows a balance emerging between the need to recognize that continued U.S. economic strength warrants higher rates with a desire to stick with a go-slow approach given the uncertainties of the global economy.

It is a situation not without inconsistency: the Fed’s official policy statement said inflation had ticked up, policymakers’ individual inflation forecasts ticked down, and Fed Chair Janet Yellen told reporters she was not sure what the data indicated.

Headline inflation has been rising, but “I am wary and have not yet concluded that we have seen a significant uptick that will be lasting,” Yellen said at a press conference following the Fed’s two-day policy meeting.

Yellen also said the U.S. economy had proved “very resilient in the face of shocks,” but noted that global risks were still too apparent to hike rates at this time. She said that “caution” would provide more certainty the U.S. economic recovery would be sustained.

The half-empty half-full approach avoids any clear resolution of a disagreement at the highest levels of the central bank over how to interpret recent data. Yellen indicated as much, noting that the policy-setting committee had for the second meeting in a row been unable to agree on summary language about the overall risks faced by the U.S. economy.

A risk assessment has been a staple of Fed statements, used as a way to signal the direction of policy.

“We decline to make a collective assessment,” Yellen said. “Some participants see them as balanced. Some see them as weighted to the downside.”

She stressed the uncertainty facing the committee, with its members poised to hike rates even as they cut the U.S. growth forecast and slowed the expected pace of monetary tightening.

Overall, “you have seen a shift in most participants’ path of policy. That largely reflects a somewhat slower projected path for global growth,” Yellen said. Interest rates will move higher if the Fed’s baseline forecast proves accurate, she added, “but proceeding cautiously will allow us to verify” that the economic recovery remains on track.

CAUTIOUS APPROACH

In its policy statement, the Fed noted the risks still emanating from overseas, which Yellen said included renewed signs of weakness in Japan and Europe, and the ongoing slowdown in China.

“Our first take on this is that it probably leans slightly more dovish, relative to expectations,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York.

The dollar fell sharply against a basket of currencies after the statement. Yields on U.S. Treasuries dropped across the board, while stock markets rallied. The S&P 500 closed at its highest level since Dec. 31.

In fresh individual forecasts, policymakers projected weaker economic growth and lower inflation this year and lowered their estimate of where the targeted lending rate would be in the long run to 3.30 percent from 3.50 percent – a signal that the economic recovery would remain tepid.

The interest rate outlook was a shift from the four quarter-point hikes expected when the Fed raised rates in December for the first time in nearly a decade. But global market volatility early this year clouded that plan.

The Fed had adopted a cautious approach at its last policy meeting in January, amid a selloff on financial markets, weaker oil prices and falling inflation expectations.

Policymakers also signaled on Wednesday they expected continued improvement in the job market, with the unemployment rate expected to decline to 4.7 percent by the end of the year and fall further in 2017 and 2018.

And they marked down their forecast for inflation this year to 1.2 percent from 1.6 percent, though it’s seen recovering to close to the central bank’s 2 percent medium-term target next year.

Kansas City Fed President Esther George dissented in favor of raising rates at this week’s meeting.

(Reporting by Howard Schneider and Lindsay Dunsmuir; Additional reporting by Jonathan Spicer, Jason Lange, Lucia Mutikani and Megan Cassella; Editing by David Chance and Paul Simao)

Bank of Japan stuns markets by implementing negative interest rates

TOKYO (Reuters) – The Bank of Japan unexpectedly cut a benchmark interest rate below zero on Friday, stunning investors with another bold move to stimulate the economy as volatile markets and slowing global growth threaten its efforts to overcome deflation.

Global equities jumped, the yen tumbled and sovereign bonds rallied after the BOJ said it would charge for a portion of bank reserves parked with the institution, an aggressive policy pioneered by the European Central Bank (ECB).

“What’s important is to show people that the BOJ is strongly committed to achieving 2 percent inflation and that it will do whatever it takes to achieve it,” BOJ Governor Haruhiko Kuroda told a news conference after the decision.

In adopting negative interest rates Japan is reaching for a new weapon in its long battle against deflation, which since the 1990s have discouraged consumers from buying big because they expect prices to fall further. Deflation is seen as the root of two decades of economic malaise.

Kuroda said the world’s third-biggest economy was recovering moderately and the underlying price trend was rising steadily.

“But there’s a risk recent further falls in oil prices, uncertainty over emerging economies, including China, and global market instability could hurt business confidence and delay the eradication of people’s deflationary mindset,” he said.

“The BOJ decided to adopt negative interest rates … to forestall such risks from materializing.”

Kuroda said as recently as last week he was not thinking of adopting a negative interest rate policy for now, telling parliament that further easing would likely take the form of an expansion of its massive asset-buying program.

But, with consumer inflation just 0.1 percent in the year to December despite three years of aggressive money-printing, the BOJ’s policy board decided in a narrow 5-4 vote to charge a 0.1 percent interest on a portion of current account deposits that financial institutions hold with it.

The central bank said in a statement announcing the decision it would cut interest rates further into negative territory if necessary, in its battle against deflation.

“Kuroda had been saying that he didn’t think something like this would help so it is a bit surprising and it’s clear the market has been surprised by it,” said Nicholas Smith, a strategist at CLSA based in Tokyo.

Some economists doubted the BOJ move would prove effective.

“It has gone on the defensive,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute. “It made this decision not because it’s effective, but because markets are collapsing and it feels it has no other option.”

GOING NEGATIVE

Several European central banks have cut key rates below zero, and the ECB became the first major central bank to do so in June 2014.

In pursuing the same path, the BOJ is hoping banks will step up lending to support activity in the real economy, rather than pay a penalty to deposit excess cash at the central bank.

There is little sign of any pent-up demand from Japanese banks or cash-rich companies for fresh funds, however, and any money released into the system may merely be hoarded or steered into speculative activity.

“This is an aggressive all-stick-no-carrot approach to spurring investment,” said Martin King, co-managing director at Tyton Capital Advisors in Tokyo.

The BOJ maintained its pledge to expand base money at an annual pace of $675 billion via aggressive purchases of Japanese government bonds (JGBs) and risky assets conducted under its quantitative and qualitative easing (QQE) program.

The BOJ’s move – boosting the dollar by 1.7 percent against the yen – could make it even harder for the U.S. Federal Reserve to raise interest rates four times this year, as originally envisaged by its policy board.

“REGIME CHANGE”

Markets have been split on whether Japan’s central bank would ease policy as slumping oil costs and soft consumer spending have ground inflation to a halt, knocking price growth further away from the BOJ’s ambitious 2 percent target.

This is the fourth time the BOJ has pushed back its time frame for hitting its inflation target – from an initial goal of around March 2015.

Friday’s surprise interest rate decision came in the wake of data that showed household spending and output slumped in December, underscoring the fragile nature of Japan’s recovery.

Many analysts had already been suggesting that the BOJ had little scope left to expand its asset-buying program.

“I think this is a regime change and the BOJ’s main policy tool is now negative interest rates,” said Daiju Aoki, an economist at UBS Securities in Tokyo. “This shows that the ability to buy more JGBs is limited.”

Kuroda said the BOJ was not running out of policy ammunition.

“Today’s steps don’t mean that we’ve reached limits to our JGB buying,” he said. “We added interest rates as a new easing tool to our existing QQE framework.”

(Additional reporting by Stanley White, Tetsushi Kajimoto, Kaori Kaneko and Joshua Hunt; Writing by Alex Richardson; Editing by Eric Meijer and Jacqueline Wong)

Fed keeps interest rates steady, closely watching global markets

WASHINGTON (Reuters) – The U.S. Federal Reserve kept interest rates unchanged on Wednesday and said it was “closely monitoring” global economic and financial developments, signaling it had accounted for a stock market selloff but wasn’t ready to abandon a plan to tighten monetary policy this year.

The decision by the central bank’s rate-setting committee was widely expected after a month-long plunge in U.S. and world equities raised concerns an abrupt global slowdown could drag on U.S. growth.

Fed policymakers said the economy was still on track for moderate growth and a stronger labor market even with “gradual” rate increases, suggesting its concern about global events had diminished but not squashed chances of a rate hike in March.

“The committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation,” the Fed said in its policy statement following a two-day meeting.

Wall Street fell after the statement, with the Standard & Poor’s 500 index closing down more than 1 percent. Prices for U.S. Treasuries were mixed, while the dollar extended losses against a basket of currencies.

In an indication the Fed was taking global risks seriously, a prior reference to the risks to the economic outlook being “balanced” was removed from its statement. Instead, it said it was weighing how the global economy and financial markets could affect the outlook.

“It is clear that several FOMC members have become more worried,” said Harm Bandholz, an economist at Unicredit in New York, referring to the Fed’s rate-setting Federal Open Market Committee.

Shrugging off economic weakness in China, Japan and Europe, the Fed last month raised its key overnight lending rate by a quarter point to a range of 0.25 percent to 0.50 percent and issued upbeat economic forecasts that suggested four additional hikes this year.

Wall Street’s top banks, however, expect only three rate increases before the end of the year, according to a Reuters poll released after the Fed’s statement on Wednesday. That was in line with expectations earlier in January.

Investors are betting on one quarter-point rate increase in 2016.

Prices for Fed funds futures on Wednesday showed traders had pushed back bets for the next rate hike to July from June and modestly trimmed bets on a March hike.

“The Fed has maintained its composure in the face of global pressures,” said Joe Manimbo, an analyst at Western Union Business Solutions.

JOB GAINS

U.S. exports took a hit last year, largely due to the impact of a strong dollar, but consumer spending accelerated and overall employment surged by 292,000 jobs in December.

The Fed said on Wednesday that a range of recent labor market indicators, including “strong” job gains, pointed to some additional firming in the job market.

Oil prices have also plummeted this year, which could keep U.S. inflation below the Fed’s 2 percent target for longer, but the central bank said it still expects the downward inflationary pressure from lower energy and import prices to prove temporary.

Policymakers will be able to sift through the January and February U.S. employment reports before their next policy meeting in March.

(Reporting by Jason Lange and Howard Schneider; Additional reporting by Lindsay Dunsmuir; Editing by David Chance and Paul Simao)

Fed Raises Interest Rates, Citing Ongoing U.S. Recovery

By Howard Schneider and Jason Lange

WASHINGTON (Reuters) – The Federal Reserve hiked interest rates for the first time in nearly a decade on Wednesday, signaling faith that the U.S. economy had largely overcome the wounds of the 2007-2009 financial crisis.

The U.S. central bank’s policy-setting committee raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25 percent and 0.50 percent, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs.

“With the economy performing well and expected to continue to do so, the committee judges that a modest increase in the federal funds rate is appropriate,” Fed Chair Janet Yellen said in a press conference after the rate decision was announced. “The economic recovery has clearly come a long way.”

The Fed’s policy statement noted the “considerable improvement” in the U.S. labor market, where the unemployment rate has fallen to 5 percent, and said policymakers are “reasonably confident” inflation will rise over the medium term to the Fed’s 2 percent objective.

The central bank made clear the rate hike was a tentative beginning to a “gradual” tightening cycle, and that in deciding its next move it would put a premium on monitoring inflation, which remains mired below target.

“The process is likely to proceed gradually,” Yellen said, a hint that further hikes will be slow in coming.

She added that policymakers were hoping for a slow rise in rates but one that will keep the Fed ahead of the curve as the economic recovery continues. “To keep the economy moving along the growth path it is on … we would like to avoid a situation where we have left so much (monetary) accommodation in place for so long we have to tighten abruptly.”

New economic projections from Fed policymakers were largely unchanged from September, with unemployment anticipated to fall to 4.7 percent next year and economic growth hitting 2.4 percent.

The Fed statement and its promise of a gradual path represented a compromise between policymakers who have been ready to raise rates for months and those who feel the economy is still at risk from weak inflation and slow global growth.

“The Fed is going out of its way to assure markets that, by embarking on a ‘gradual’ path, this will not be your traditional interest rate cycle,” said Mohamed El-Erian, chief economic advisor at Allianz.

Fed officials said they were confident the situation was ripe for them to make a historic turn in policy without much disruption to financial markets, which had expected the hike this week.

U.S. stocks rallied on the news, in part because the Fed made clear it would proceed slowly with further tightening. Yields on U.S. Treasuries rose, while the dollar was largely unchanged against a basket of currencies. Oil prices fell sharply before paring losses.

POLICY STILL ACCOMMODATIVE

Yellen on Wednesday said the Fed had no desire to curb consumers from spending or businesses from investing. She emphasized that interest rates remained low even after the rate hike, near levels economists regard as appropriate for a recession.

“Policy remains accommodative,” Yellen said. “The U.S. economy has shown considerable strength. Domestic spending has continued to hold up.”

Fed policymakers’ median projected target interest rate for 2016 remained 1.375 percent, implying four quarter-point hikes next year. Based on short-term interest rate futures markets, traders expect the next rate hike in April.

A Dec. 9 Reuters poll showed economists forecasting the federal funds rate to be 1.0 percent to 1.25 percent by the end of 2016 and 2.25 percent by the end of 2017.

The rate hike sets off an immediate test of new financial tools designed by the New York Fed for just this occasion, as well as a likely reshuffling of global capital as the reality of rising U.S. rates sets in.

To edge the target rate from its current near-zero level to between 0.25 percent and 0.50 percent, the Fed said it would set the interest it pays banks on excess reserves at 0.50 percent, and would offer up to $2 trillion in reverse repurchase agreements, an aggressive figure that shows its resolve to pull rates higher.

The impact on business and household borrowing costs is unclear. One of the issues policymakers will watch closely in coming days is how long-term mortgage rates, consumer loans and other forms of credit react to the rate hike.

(Additional reporting by Lindsay Dunsmuir and David Chance in Washington, Ann Saphir in San Francisco and Jonathan Spicer and David Gaffen in New York; Editing by Paul Simao)

Federal Reserve Holds the Line on Interest Rates

The Federal Reserve announced Thursday afternoon that they will be holding the line on interest rates, extending to 10 years the amount of time since the last increase of the key interest rate.

The Federal Open Market Committee (FOMC) statement said they see “economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft.”

The FOMC also said they focused on the slight increase in employment totals but also inflation below expectations and declines in energy prices and the cost of non-energy imports.

“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate,” the FOMC statement read.

The Fed did increase their view of the economy for the year.  They predict a 2.1% increase this year, up from a 1.9% prediction.

For the first time this year, the vote was not unanimous.  Richmond Fed President Jeffrey Lacker voted to raise the rate.