Federal Reserve Punts on Policy

The US Federal Reserve kept its benchmark interest rate unchanged on Wednesday as Chairwoman Janet Yellen said she saw no reason to rush, instead preferring to “watch incoming evidence.”  But concern among some Fed officials – including the hawkish bloc of Esther George, Eric Rosengren and Loretta Mester - is growing. They reckon the central bank is taking too long to restore borrowing costs to normal levels. All three members voiced their dissent against the official FOMC statement. That was highly unusual considering Yellen's past deftness at keeping members united. The decision to bide time was passed by a 7 to 3 vote, the narrowest margin since the December 2014 meeting.  Most economists now believe a rate hike at Fed’s next gathering on November 1-2 is improbable considering its proximity to Election Day. As a result, risk assets climbed, led by performance in equities.

After resounding disappointments from both of the Bank of Japan and the US Federal Reserve, the US dollar slid to a 4-week low against the Japanese Yen on Thursday after the Fed forecast a less aggressive stance to interest rates hikes. The USDJPY pair flirted with 100.10 at one point, the lowest since August 26, before paring some losses to bounce back to the upside near 100.25.  Currency strategists expect the dollar to decline further against the Yen in the coming few months. Considering no new easing measures are immediately expected from Japanese policymakers, the Yen strength may persist over the medium-term, hurting exporters and the fight against deflation.  The Yen is showing strong signs of resilience as doubts linger over whether the Bank of Japan's latest policy tweak was enough to induce inflation and restore growth.