22/09/16 - Fed Remains Dovish, Keeps Rates on Hold

USD

The Federal Reserve once again left interest rates on hold at the September meeting, as expected. It said that economic activity had picked up, job gains were ‘solid’, and that the case for a rate increase ‘had strengthened’.  

Three out of ten of the US central bank’s rate-setters called for an immediate increase, but ultimately the Fed opted to keep it’s policy on hold as it waits for further evidence of progress towards its objectives. Since December 2015, the US central bank has kept it’s target rate for overnight lending between banks in a range of 0.25% to 0.5%.

On Tuesday, data showed housing starts fell more than expected in August as building activity declined after rising for two straight month.

GBP

British investment and employment are likely to be flat over the coming year because of the June vote to leave the European Union, according to a Bank of England survey of businesses that leaves it on track to cut interest rates again this year. The BoE's regional agents, who speak to companies around the country, found signs of resilience in consumer spending and the housing market so far. But they also detected a growing reluctance among businesses to hire and invest. "Investment and employment intentions had fallen, and were consistent with broadly flat levels of capital spending and employment over the coming six to 12 months," the BoE said.

The BoE has said it expects Britain's growth rate to more than halve next year to 0.8 percent. On Wednesday the Paris-based OECD think tank halved its forecast for British economic growth in 2017 to 1.0 percent. Also on Wednesday, Britain's official statistics office said the referendum appeared to have had little impact on the economy so far, but the longer-term effects remained unclear. Given the weak growth outlook, the BoE is widely expected to cut interest rates, which are already at a historical low, to just a fraction above zero in November.

The Bank said last week most of its policymakers still expected to reduce borrowing costs unless their long-term view of the economy changed. That was despite growing signs that the immediate post-referendum slowdown will be less sharp than first feared. Economists are also focused on finance minister Philip Hammond's first mid-year budget statement on Nov. 23. He has said he will delay plans to achieve a budget surplus and he will consider some modest increases in spending to help the economy.

JPY

The yen rebounded on Wednesday, with investors sceptical about whether the Bank of Japan's latest measures will be enough to generate inflation and many also cautious about the dollar before the Federal Reserve policy announcement. Japan's central bank has overhauled its massive stimulus program, scrapping its focus on monetary base and setting targets for long-term rates. It also committed to overshooting its elusive 2 percent inflation target.

The BOJ maintained the 0.1 percent negative interest rate for some of the excess reserves that financial institutions park with the central bank. But it abandoned its base money target and instead set a "yield curve control," under which it will buy long-term government bonds to keep 10-year bond yields around their current zero percent.

Key Announcements

13.30 – USD – Unemployment claims; forecast at 261k against previous of 260k

14:00 – ECB – ECB President Draghi Speaks; Speaking at European Systemic Risk Board