Finally global growth concerns won and the healing U.S. job market lost out. A terrible upheaval in the global investing backdrop in August led by the Chinese market crash, swooning commodities and their ripple effect on other emerging economies held back the Fed from pulling the trigger on a lift-off this September. Muted inflation played its role as expected and a still-strong greenback was the final nail in the coffin.
It’s not enough that the U.S. labor market is marching ahead on a pretty decent pace as evident by the unemployment rate dropping to 5.1% in August, the lowest since April 2008 and the U.S. economy underwent an upward GDP revision for the second quarter of 2015, from 2.3% reported earlier to 3.7%. In today’s world of open economy, one just simply cannot ignore foreign forces.
The recent global market rout bore this evidence when the U.S. stocks futures saw their largest weekly declines since 2011 and all three key U.S. indices went into a correction mode. Investors extracted $10 billion from the big S&P 500-based ETFs in the three days through September 8, 2015, as per Bloomberg.
The latest inflation pointer for the month of August also added to the pessimism. On a monthly basis, U.S. consumer prices witnessed the first decline of 0.1% in seven months, hit mainly by fast-falling oil prices. The gasoline index plunged 4.1% in August representing the steepest fall since January. Also, the recent sluggish market activity could weigh even further on inflation.
Fed’s Projection
The Fed lowered its 2015 projection for personal consumer expenditure inflation to 0.3?1.0% from 0.6?1.0% guided in June. The expectation for 2015 real GDP growth has been upgraded to 1.9?2.5% from 1.7?2.3% projected in June while the same for 2016 was lowered to 2.1?2.8% from 2.3?3.0%.
However, as already discussed, unemployment was the true healer with its expectation for 2015 being ticked down from 5.0?5.3% to 4.9?5.2%. The coming two years will also see the same uptrend as estimates for 2016 were lowered from 4.6?5.2% to 4.5?5.0% while the same for 2017 was moved down from 4.8?5.5% to 4.5?5.0%.
However, the Fed made it clear that it is well on its way to tighten the policy sometime this year and a ‘possible’ lift-off can be seen in its October meeting. But to reciprocate to subdued inflation and global threats which can thwart American growth momentum anytime, the Fed slashed its projection for the benchmark interest rate for 2015, 2016 and 2017. Fed’s funds rate for the longer run was cut to 3.0?4.0% from 3.3?4.3% suggesting a slower rate hike trail.
Market Impact
Though the world was closely eyeing this September policy meet, a dovish Fed (what the case finally turned out) was not all unexpected. Traders had already started preparing for a still-accommodative Fed as evident from about $15 billion invested in U.S. stock ETFs in Monday and Tuesday.
Whatever the case, as the Fed stayed put, some big moves in various markets and asset classes were prompted. Yield on the benchmark 10-Year U.S. Treasury note plunged to 2.21% on September 17 from 2.30% recorded the day earlier. Yield on the 6-month U.S. Treasury note also fell 8 bps to 0.24% on September 17 while Yield on the 3-year U.S. Treasury note plummeted 13 bps.
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