Global stocks flat as investors await Fed meeting outcome

Andrew Cummings
September 21, 2017

The Fed signalled it still expects one more interest rate hike by the end of the year, despite a recent bout of low inflation, but ratcheted down its long-term interest rate forecasts.

But the central bank has been going backward in trying to meet its other mandate of stabilizing prices at an annual inflation rate of 2 percent over time. Investors typically sell shares of utilities when interest rates rise, partly because they lose their appeal as bond proxies since investors can expect similar returns investing in bonds. A higher target rate, meanwhile, would push the Fed further from the zero percent lower bound it has been trying to escape after a decade nurturing the US economy into a post-crisis recovery. So, now that rates are on the up and the flow of credit is being removed - albeit slowly - a few new bumps in the road are likely.

The Fed announced Wednesday that it will let a small portion of its $4.5 trillion balance sheet mature without being replaced, starting in October with reductions of $10 billion a month and gradually rising over the next year to $50 billion a month.

She said the Fed would adjust its policymaking if it thought the causes of low inflation had become permanent.

OIL: Benchmark U.S. crude rose 1.1 percent to $50 a barrel on the New York Mercantile Exchange while Brent crude, used to price worldwide oils, advanced by the same rate to $55.77 per barrel in London. In a press conference, Fed chair Janet Yellen described it as something of a "mystery".

The economy expanded at a 2.1% annual rate in the first half, in line with the pace during this expansion, and US government 10-year notes yield about 2.24%, down from 2.45% at the start of the year.

Yellen earlier this year blamed temporary factors, such as the introduction of cheaper mobile phone plans, for the persistence of undesirably low inflation. At present, the market has a 60% expectation of a rate hike in December.

However, the central bank said the economic impact of the storm is likely to be felt only in the near term. Inflation has been stubbornly low for years, suggesting the Fed should hold off.

Of course, raising rates is also part of policy normalisation.

But with inflation finally showing signs of life in August, more analysts now see an increased chance of a rate increase in December. Yellen's four-year term as chair will end on February 3.

Yellen said the recent data breach points to the importance for strong cybersecurity controls - and that the Fed and other regulators are focused on ensuring banks have them in place, she noted.

With several seats on the Fed's board open or soon to be open, Trump has made just one nomination, that of Randal Quarles to be vice chairman for supervision.

The seven-member Fed board will soon have four openings, after the announcement this month by Stanley Fischer that he is stepping down as vice chairman.

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