Gloom lifted across global markets following a decision by the US Federal Reserve to raise its benchmark lending rate by a quarter point. The South African rand strengthened on the news, while stocks rallied in many markets. There are two more increases projected for this year. Many analysts were delighted with the US Fed move, seeing it as sign that the US will raise rates without knocking global equity markets. Federal Reserve Bank Governor Janet Yellen, meanwhile, was at pains to emphasise that the US is not on a ‘pre-set course’. Weaker Asian currencies could make exports from that region cheaper, although many expect US President Donald Trump to make moves to protect the US economy. Although the rand has perked up, over five years the South African currency has been declining steadily against the greenback. In 2012, one dollar cost just over R7; today you pay not far off R13 for every dollar. This general trend underscores the long-term need to diversify investments across currencies. – Jackie Cameron
By Min Jeong Lee and Eric Lam, Bloomberg, with Fin24
The rand rallied by almost 1.5% on Thursday after the Federal Reserve’s move to raise interest rates without accelerating the timeline for future tightening sent global stocks and bonds jumping.
The rand was trading at R12.85/$, while rallies from Seoul to Jakarta pushed the MSCI Asia Pacific Index to the highest since mid-2015, after the S&P 500 Index jumped by the most in two weeks. Hong Kong shares briefly trimmed gains after China followed the Fed in raising rates. The yen was little changed as the Bank of Japan kept its unprecedented monetary easing program unchanged. The yield on 10-year Treasuries traded below 2.5% while gold and oil extended gains.
“The world’s improving,” said Chris Weston, chief markets strategist at IG in a phone interview from Melbourne. “There’s some signs of animal spirits coming through markets.”
The Fed raised its benchmark lending rate a quarter point and continued to project two more increases this year. US equities extended gains as Chair Janet Yellen said in a press conference that the “simple message is the economy is doing well.”
Investors anticipated the tightening and Treasury yields had climbed with the dollar on speculation the central bank might signal a faster pace of tightening. Those trades unwound late on Wednesday in the US as the Fed indicated it hasn’t fallen behind with its efforts to keep inflation in check.
“The Fed did a good thing as they signaled they will raise rates without destroying global equity markets,” said Norihiro Fujito, a Tokyo-based senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities. “The Fed’s outlook hasn’t changed much from where they were in December, but the markets had gone overboard with rate hike expectations.”
Just hours after the Fed’s decision, the BOJ left its plans unchanged, increasing the policy divergence between the two central banks. With the economy slowly improving and bond yields under control, the BOJ is in position to hold steady for now. Meanwhile, China’s central bank raised borrowing costs as a stable economy and factory reflation give it scope to follow the Fed. The People’s Bank of China increased the rates it charges in open-market operations and on its medium-term lending facility.
Investors also reacted to economic data and developments in European politics. The euro touched a one-month high Wednesday after Dutch Prime Minister Mark Rutte’s Liberals easily beat the anti-Islam Freedom Party of Geert Wilders. The Australian dollar and kiwi slipped amid disappointing reports on unemployment and gross domestic product.
The Bank of England, the Swiss National Bank, Bank Indonesia and the Turkish central bank are also expected to stand pat in policy decisions. US Secretary of State Rex Tillerson travels to Japan, South Korea and China in his first visit to the region since taking office.
Yellen calms fears Fed’s policy trigger finger is getting itchy
Federal Reserve Chair Janet Yellen sought to reassure investors that the central bank’s latest interest-rate increase wasn’t a paradigm shift to a trigger-happy policy driven by fears of faster inflation.
Speaking to reporters after the Fed’s quarter percentage-point move on Wednesday, Yellen said the central bank was willing to tolerate inflation temporarily overshooting its 2% goal and that it intended to keep its policy accommodative for “some time.”
“The simple message is the economy’s doing well. We have confidence in the robustness of the economy and its resilience to shocks,” she said.
— Bloomberg (@business) March 16, 2017
As a result, the Fed is sticking with its policy of gradually raising interest rates, Yellen said. In their first forecasts in three months, Fed policy makers penciled in two more quarter-point rate increases this year and three in 2018, unchanged from their projections in December.
Today’s decision “does not represent a reassessment of the economic outlook or of the appropriate course for monetary policy,” the Fed chief said.
Speculation of a more aggressive Fed had mounted in recent days after a host of central bank officials, including Yellen herself, went out of their way to telegraph to financial markets that a rate hike was imminent. The expectations were further fuelled by news of rising inflation.
Stocks rose and bond yields fell as investors viewed the statement from the Federal Open Market Committee and Yellen’s remarks afterward as a sign that the Fed isn’t in a hurry to remove monetary stimulus. The FOMC raised the target range for the federal funds rate to 0.75% to 1%, as expected, but Yellen’s lack of urgency to snuff out inflation was a surprise.
RJ Gallo, a fixed-income investment manager at Federated Investors in Pittsburgh, said the chorus of Fed speakers before this meeting led investors to expect a move up in the number of projected rate hikes this year, and even upgrades by Fed officials in the levels of inflation and growth they anticipated.
None of that materialised.
“You didn’t get any of those things,” Gallo said, which explains why Treasury yields quickly dropped after the Fed released the FOMC statement and a new set of economic projections. “The expectation that Fed was getting more hawkish had to come out of the market.”
The US economy has mostly met the central bank’s goals of full employment and stable prices, and may get further support if President Donald Trump delivers promised fiscal stimulus. Investor and business confidence has soared since Trump won the presidency in November, buoyed by his vows to cut taxes, lift infrastructure spending and ease regulations.
Still, the data don’t show an economy that’s heating up rapidly – a point Yellen herself made after the third rate hike since the 2007-2009 recession ended. In fact, the economy may have “more room to run,” she said.
Stronger business and consumer confidence hasn’t yet translated into increased investment and spending, said Yellen.
“It’s uncertain just how much sentiment actually impacts spending decisions, and I wouldn’t say at this point that I have seen hard evidence of any change in spending decisions,” said the Fed Chair. “Most of the business people that we’ve talked to also have a wait-and-see attitude.”
Retail sales in February grew at the slowest pace since August, a government report showed earlier Wednesday. The Atlanta Fed’s model for GDP predicts an expansion of 0.9% in the first quarter, less than a third the pace Trump is aiming for.
Asked about the potential for a fiscal boost, Yellen made clear the Fed is still waiting for more concrete policy plans to emerge from the Trump administration before adapting monetary policy in reaction.
“There is great uncertainty about the timing, the size and the character of policy changes that may be put in place,” Yellen said. “I don’t think that’s a decision or set of decisions that we need to make until we know more about what policy changes will go into effect.”
#JanetYellen inadvertently lets slip that she has no confidence in the U.S. economy or the sustainability of the recovery!
— Peter Schiff (@PeterSchiff) March 15, 2017
Yellen disputed suggestions that the Fed was on a collision course with the Trump administration over its plans to foster faster economic growth through tax cuts and deregulation. “We would welcome stronger economic growth in the context of price stability,” she said.
She said she had met Trump briefly and had gotten together a couple of times with Treasury Secretary Steven Mnuchin to discuss the economy and financial regulation.
Further underscoring their lack of urgency, Fed officials repeated a commitment to maintain their balance-sheet reinvestment policy until rate increases were well under way. Yellen said officials had discussed the process of reducing the balance sheet gradually, but had made no decisions and would continue to debate the topic.
Policy makers forecast inflation will reach 1.9% in the fourth quarter this year, and 2% in both 2018 and 2019, according to quarterly median estimates released with the FOMC statement. The Fed’s preferred measure of inflation rose 1.9% in the 12 months through January, just shy of its target.
Yellen pointed out, though, that core inflation continues to run somewhat further below 2%. That rate, which strips out food and energy costs, stood at 1.7% in January. The Fed’s new forecast for the core rate at the end of this year edged up to 1.9%, from 1.8% in December.
“The committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal,” the Fed said. Discussing the word symmetric in the statement, Yellen said during her press conference that the Fed was not shooting to push inflation over 2% but recognised that it could temporarily go above it. Two percent is a target, she reiterated, not a ceiling. – Fin24