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FUNDAMENTAL ANALYSIS

Fed Set Cautious Tone at June Meeting

Fed, Set, Cautious, Tone,  June, Meeting, Fundamental Analysis, fx trader, forex

11 Jul 2016

The June 15th Federal Reserve communication was interpreted as more dovish than expected by the markets. This was mainly due to a decrease in the Federal funds rate forecasts from the dot plot produced by Fed members. Additionally, the statement and press conference failed to make any serious suggestion of a rate hike in July.

Let’s dig into the data

It was not only the  FFR  forecasts that were reduced but also growth was downgraded from the March projections. Growth for 2016 was downgraded to 2.0% from 2.2%, and 2017 growth downgraded to 2.0% from 2.1%.

PCE inflation for 2016 was also raised to 1.4% from 1.2%. However,  this refers to headline inflation and thus encompasses the rise in oil prices which has been witnessed during the first half of the year. Longer-run  Federal  funds rate forecasts were reduced to an estimate of 3% from a March projection of 3.25%.

Is a rate hike on the way?

The majority of Fed members still see two hikes during 2016, however, the number of these members has reduced. Of the seventeen members, there are now six who see only one hike in 2016, compared to only one member with this view at the March projection.

The monetary policy decision statement mentioned that the labour market had slowed alongside a pickup in economic activity. One of the key risks to the Fed’s economic outlook was the UK referendum to leave the European Union.

“It is a decision that could have consequences for economic and financial conditions in global financial markets,” Fed chair Yellen said during her press conference.

The outcome of the vote - which was for the UK to leave the European Union - materialised as the worst of the two outcomes in the eyes of the Fed and they will now increase their cautiousness regarding raising rates due to the financial uncertainty that may spread as a result of Brexit.

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