Fed holds interest rates unchanged

By | August 1, 2016

The Federal Reserve (Fed) on Thursday decided not to increase interest rates and so they are kept at the levels since the end of 2015. Despite the fact that the Federal Open Market Committee (FOMC) observed strengthening of economic sectors and indicators, the overnight interest rate has actually been left unchanged at 0.25%.

The statement that followed the Fed interest rate decision noted that June’s Nonfarm Payrolls (NFP) data increase of 287,000 were significantly stronger than May’s 11,000, and that in general the labour market in recent months showed improvement. It also said that there has actually been strengthening of household spending.

Despite the comments on economic growth, the statement pointed that inflation levels remain below the 2% target and there is expectation that there could be no substantial improvement in the near term until the labour market shows additional strengthening and until oil prices increase. Moreover, there was reference to mild business investing.

The Fed’s overall tone through its statement can be seen as preparing the markets for a potential rate increase when the FOMC meets again in 20 September. But they did not provide any assurances of that happening because a lot could happen between now and the next meeting, including unexpected economic indicators, geopolitical developments or any other events that can shake the state of the local and/or global economy.

The EUR/USD on Thursday rallied to 1.11186 but subsequently erased some of the gains and ended the day’s trading with a 0.4% increase to 1.10815. On a weekly basis there further gains for the currency pair by a total of 1.9%.

Gold prices rallied as there was interpretation by some investors that the Fed’s tone was actually dovish and that there could be no plans of a single rate hike during the current year. Some will also argue that leaving the chance of an increase is compulsory given they past comments and intentions, while they mainly emphasised their hesitation to lift rates after the UK’s Leave vote. Fed’s comments after the expectation for a hawkish tone has actually worked in favour of gold prices. On Wednesday gold’s price moved with an increase by 1.6% to $1,339.50 per ounce, while on a weekly basis the yellow shiny metal gained by 2.1%.

The decision not to increase interest rates has actually been taken following concerns over global growth, although there was no reference within the Fed statement. The UK’s decision to leave the European Union has actually influenced the Fed’s decision not to proceed with an interest rate increase in June, while while the slow economic growth of both China and the EU have actually forced it to hold rates unchanged in the past. It is now uncertain whether the U.S. policymakers will proceed with one instead of two rate hikes before the end of the year, while it is impossible to be assured about the number of rate hikes during 2017.

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