Dollar subdued as Trump probe, weak USA data overshadow Fed

15 Juin, 2017, 16:49 | Author: Marc Bacque
  • Federal Reserve Building

The PBOC is also keeping a close eye on seasonal liquidity tightness, and has moved to inject large amounts of funds to ease worries about another cash crunch like that in June 2013, when sent money market rates skyrocketing.

While the market seems to interpret rate hikes as too hawkish from an inflation perspective, one could make the case they are too dovish given low unemployment rates. With today's action, the Fed has hiked rates four times since December 2015, for a total of 100 bps, the practical minimum for the central bank to pass its self-imposed test. The market is expecting one more rate hike by the Fed in the current fiscal year.

The rate hike and the accompanying decision to ramp up the pace of Fed's balance sheet reduction implied that the United States economy was growing, said Julian Tarrobago, who manages $1.9 billion in assets for ATR Asset Management.

"Information received since the federal open market committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year", the Fed said in a statement.

But the estimate for the central bank's preferred measure of inflation, the PCE price index, was cut three-tenths to 1.6 percent, while the core PCE, which excludes volatile food and energy prices, was cut two-tenths to 1.7 per cent, according to the Summary of Economic Projections.

And the most important pillar of the economy - the job market - remains solid if slowing, with unemployment at a 16-year-low of 4.3 per cent - even below the level the Fed associates with full employment.

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Against that backdrop, Treasury yields rebounded slightly (http://www.marketwatch.com/story/treasury-yields-rise-slightly-after-feds-policy-update-2017-06-14) with the yield on the 10-year bond, which moves inversely to prices, down 8 basis points to 2.128%, the lowest level since last November, while the yield on the two-year Treasury was down 5 basis points at 1.319%.

Gold turned negative after the Fed rate increase.

Stocks are showing a muted reaction to the Fed announcement but they're still focused on growth, unlike bonds, which are moving more cautiously, said Joe Saluzzi, co-head of equity trading at Themis Trading.

The Fed also mapped out a very gradual approach to shrink its $4.2-trillion holdings of Treasury- and mortgage-backed assets that would allow it to begin as early as September.

The Fed sees the cap for Treasury securities to be $6bn per month initially, increasing in $6bn increments at three-month intervals over 12 months until it reaches $30bn per month. "But shrinking balance sheet would boost the dollar in the long run", the trader said, noting the Fed's plan to reduce its portfolio would "inevitably" pile pressure on the Chinese yuan. Balance sheet reductions also can have a tightening effect. "Until we see a reversal of the recent weakness in economic growth, retail sales and inflation, the Fed will be on the sidelines". It forecast that prices will rise just 1.6 per cent this year, down from a March forecast of 1.9 per cent. Yellen's term as chair ends in February 2018, and Trump has not said if he would ask her to stay on.

Near-term risks to the economy "appear roughly balanced", but the Fed is "monitoring inflation developments closely", the bank said. "The expectation will still be that for this year and the next year, you won't get policy rates exceeding 2%".

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