Federal Reserve Tightens Policy Further

Weekly Report - 18/06/2017

US Central Bank Plans for Additional Rate Hikes


Mirroring financial market projections, the US Federal Reserve opted to increase the benchmark interest rate by 0.25% to 1.25%, pushing the US dollar off of weekly lows.  Apart from the decision to raise rates, the Central Bank upgraded its economic forecasts while outlining the steps for a gradual reduction in the amount of balance sheet assets.

Last Week

The last few trading sessions were dominated by major announcements from global central banks.  Leading off was the US Federal Reserve which concluded its two-day FOMC Meeting with a decision to raise the benchmark interest rate by 25 basis points to 1.25%.  Although recent data has not been as strong, the Fed nevertheless raised its growth projections for 2.20% expansion during the 2017 calendar year.  Apart from the more optimistic outlook, Federal Reserve Chairwoman Janet Yellen also unveiled plans to gradually unwind the balance sheet starting this year.  However, certain data may derail these plans, especially after headline consumer inflation fell to 1.90% in May alongside deteriorating housing fundamentals.

Switching gears, the UK may be approaching a monetary policy adjustment sooner than anticipated.  The pickup in headline inflation to 2.90% has been outpacing gains in wage growth which came in at 2.10% for April, increasing pressure on the Bank of England to raise rates.  Three members of the Monetary Policy Committee dissented from the decision to keep rates on hold, underscoring the increasingly hawkish stance of policymakers.  Finally, the Bank of Japan also refrained from adjusting monetary policy during the latest decision, opting to leave interest rates and quantitative easing on hold while upgrading the growth outlook.


The Week Ahead

After a week full of monetary policy decisions, the coming sessions will be focused on trade and PMI data.  Kicking off the week, Japan is set to report the trade balance, with the surplus expected to shrink dramatically despite forecasts for a pickup in export growth.  Should both import and export figures match or exceed forecasts, it will be an overwhelmingly positive sign for the economy and inflation which has proven uneven.  Switching gears, preliminary manufacturing and services figure from around the Euro Area are set to be announced, with the aggregate Euro Area figures projected to experience slowing expansion.

Contrasting with Europe, US preliminary PMI figures are forecast to rise modestly for the same period.  Apart from PMIs, existing and new US homes sales will be revealed, with any weakness echoing worsening housing starts and building permits data released a week earlier.  Looking north, Canadian inflation is forecast to pullback after a strong run.  Even though policymakers are growing more optimistic about the outlook, there are major concerns ahead, namely inflation and expanding housing market risks.  Aside from data, the Reserve Bank of Australia and Bank of Japan will release meeting minutes, potentially indicating their respective dovish or hawkish biases.


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