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On Wednesday afternoon the Central Committee of the Federal Reserve announced that the board of directors decided to maintain the US interest rate unchanged at 2.50%. Some investors have already started weighing on the possibility of rate cuts but were surprised to hear that the FED was not considering such a bold move until 2020.
In our earlier article from this week we reasoned that despite the improved economic conditions in the country and the recent moderate inflation data, there were growing tensions abroad, such as the trade war with China and the escalated situation in the Gulf, all of which has contributed to an increased uncertainty factor.
We argued that it would be highly unlikely for the FOMC to make any drastic decisions in such a volatile and eventful situation (you can read more about it here) and that it would be much more likely for them to remain cautious and monitor the situation as it evolves. Our initial expectations were realized, as the members of the FOMC had this to say in their statement:
“The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.” [source]
Overall, despite the increased uncertainty on the global stage, it is still premature to be discussing potential rate cuts, given the robust economic data, and only a near-term transformational change might compel the FOMC to reconsider their stance.
As regards the labour market, the current condition seems stable and sustainable, and there are no obvious reasons for investors to worry about any significantly detrimental changes in the near future, for as long as the unemployment rate remains below 4 per cent.
Image source: TradingEconomics.com
As regards inflation, despite the recent drop with 0.2 per cent below the 2 per cent symmetric target, the inflation as a whole remains resilient and the recent surge in food and energy prices gives investors confidence that the underlying rate would get back to the 2 per cent target by the end of the quarter. If you would like to learn more about the importance of food prices to the composite inflation index, then you can read more about it here.
Image source: TradingEconomics.com
Following the release of the interest rate decision and the subsequent monetary policy statement, the US Dollar Index depreciated with 1.03% in two days, as the market started to gradually assess the changed projections of the FED and the announcement that no further changes are expected to take place in 2019
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