FOMC Recap: More Dovish Uncertainty
James Chen, CMT June 15, 2016 10:00 PM
The June FOMC decision has come and gone and although the Fed fulfilled expectations by opting to keep interest rates unchanged at 0.25%-0.50%, some compellingly dovish nuances came out of both the statement and then the press conference that followed.
The decision to keep rates steady this time had no dissenting votes, unlike in prior FOMC meetings. Additionally, a full six members saw only one rate hike occurring this year, whereas only one member projected the same during the previous meeting in April.
Key among the Fed’s concerns that precluded a June rate hike were the employment situation, which showed a sharp disappointment early this month on the release of May’s Non-Farm Payrolls data, as well as lowered expectations for US economic growth. Also of concern were expectations that inflation would remain low in the near-term, falling short of the central bank’s 2% inflation target.
Wednesday’s FOMC statement reiterated that "the Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run."
While the UK’s upcoming EU referendum was not mentioned in the actual statement, Fed Chair Janet Yellen conspicuously acknowledged its impact on the rate decision in response to a question during the subsequent press conference. She stated that concerns about a possible "Brexit," or a UK decision to leave the European Union, was a factor in keeping rates unchanged. She went on to add that a Brexit outcome "could have consequences for the US economic outlook."
Prior to the release of the FOMC decision and press conference, the Fed Fund futures market had shown an implied probability of a June rate hike at less than 2% and a July rate hike at slightly above 20%. After the release, however, the July probability plunged to well below 10%, amplifying the FOMC’s dovish reverberations on the markets. The immediate market reaction to the FOMC statement was an expected drop in the US dollar, a surge in gold, and a further boost for US stocks. Stock indexes quickly pared gains, however, going into the market close.
What are the potential near-term implications of the FOMC’s dovishness? Much depends on the outcome of the UK’s EU referendum next week. In the event of a UK exit of the EU, a July rate hike could very well be precluded altogether. But even if the "Remain" camp prevails, it should take some solid US economic data, most notably a significant rebound in the June employment report that will be released early next month, for the Fed to even consider raising rates in July. Overall, it has become increasingly likely that the unswervingly cautious Fed will continue to postpone another rate hike until significantly later in the year, at best.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.