We all have been waiting for the Fed exiting the most aggressive easing program undertaken since its 100-year inception, embarked upon as a result of the worst recession since the great depression of the 1930s and finally start hiking the rates. However, the rate hike may not come as early as we expect as the low inflation and wage growth still show possible red flags in the current economic situation, even though the job market seems to be stabilized.
The FED finally dropped the patience line off its minutes, however the market reacted much different than majority of the traders and analysts initially expected. Surprise market move came after reports from the FOMC statement released on Wednesday showing the Fed downgrading its assessment of the economy, hinting on a gentler path to rate hikes, also lowering economic growth expectations for the year, as well as 2016 and 2017. Now, analysts expect the rate hike to commence in September compared to previous forecasts for June 2015.
Janet Yellen made it clear that the Fed is obviously weighing their options carefully. Having “patient” line dropped from their statement does not necessarily means that the Fed lost their patience too. The Fed Chair Yellen insisted that; “Just because we removed the word patient from the statement doesn’t mean we are going to be impatient” as the FOMC further clarified that tightening will commence only “when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”
New Era for the Fed
The decision to drop “patience” from its statement marks the beginning of the end for the outright forward guidance policy which it had adopted since 2008 and marks the beginning of a complete new era. However, traders should be cautious as the Fed will evaluate every single element before they move on with their full plan. Hence, small instability could be expected in the market due to surprises presented by the Fed.
Surprise means instability
When everyone weighs on one announcement but the Fed announce complete different scenario market welcomes this announcement as a shock wave. Hence, chaos hits the market, as we witnessed on Wednesday.
- US stocks rallied, erasing earlier losses to close higher on Wednesday
- 10-year treasury notes yielded 1.96%
- US dollar index had its worst performance for the last 11 years. USD plunged across board, falling about 400 pips against the Euro, the steepest single day drop in six years, ending the week at 1.0819, as the Euro edges towards parity with the dollar.
Global Monetary Policy Divergence in Europe
- The Swiss National Bank has cemented its interest rates at -0.75%, following its sudden decision on January 15, also scrapping the 1.20 peg of the franc against the Euro, sending the markets into frantic volatility. The bank now seeks to weaken the currency, following the extreme surge in value after the policy changes in January
- Sweden’s central bank chose to cut repo rate to −0.25% and continue purchase of government bonds for SEK 30 billion
- Norway’s Central Bank on the other hand maintained its key rate at 1.25%
- The ECB has kicked-off is bond-purchase by buying €56.95bn of Covered-Bond, settled €3.75bn of ABS purchases and €9.75bn in Public sector purchases, all as of March 13
By Orbex Analyst Yury Safronau