Market Report 18-06-21
The Federal Reserve has amended its projections for its first Federal Funds rate adjustment in a post-pandemic era.
Current rates, between 0 and 0.25%, were expected to hold until at least 2024 as the U.S. economy recovers from its worst recession since the Financial Crisis. However, according to a statement issued by the Federal Open Market Committee (FOMC) on 16/06, “progress on vaccinations has reduced the spread of COVID-19 […] amid this progress and strong policy support, indicators of economic activity and employment have strengthened”.
Assuming no “third wave” or some other significant economic upset, the faster-than-expected recovery of the U.S. economy and effective remedy of public health has led some analysts to believe that the Federal Reserve will raise its Federal Funds rate in 2023 instead, with two rate rises predicted in a “stepped” fashion.
Monetary policy decision making on interest rates is ultimately aimed at “stabilising the economy”. Higher interest rates are associated with less investment and borrowing and vice versa. Therefore, adjusting the interest rate can ensure the economy does not overheat, causing unstable inflationary pressure outside of the Reserve’s target of 2.0% over the long term.
On the topic of inflation, the FOMC stated “with inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2.0% for some time so that inflation averages 2.0% over time”. This affirms and assures the Federal Reserve’s position that current high inflation levels are transitory and nothing of concern for markets.
Global stocks slipped on the news, as higher interest rates at the “Central” level propagate higher interest rates in commercial markets, increasing the cost of borrowing. Observing the FTSE All-World Index, which assesses the performance of developed and emerging market stocks:
Additionally, the U.S. Treasury 10-year bond yield rose sharply on the news by 0.09% to 1.58% on 16/06. The yield rise can be attributed to the fact that higher interest rates on cash weaken the appeal of fixed-interest securities which offer a relatively lower “excess” rate of return.
Finally, the Dollar Index, which measures the currency against a basket of others including: the Euro, Swiss Franc, Japanese Yen, Canadian Dollar, British Pound, and the Swedish Krona, rose on the news from a close of 90.53 on 15/06 to 91.12 on 16/06 or a rise of 0.65%. This strengthening indicates that investors are anticipating higher returns from holding the currency into the future.
Any opinions expressed in these documents are those of William John and are provided for information only. E&OE.
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