Short-term economic risks have diminished
The Open Market Committee of the Fed left its key interest rates unchanged yesterday evening. The accompanying press statement provided no concrete indications as to the possible timing of the next interest rate adjustment. However, the current economic assessment is significantly more positive than in the previous statement. The Fed states that short-term risks for the US economy have diminished. The evaluation of the situation of the labour market also sounds significantly more positive. Various indicators suggest that capacity utilisation in the labour market has increased. Consumer spending is reported to be robust and economic growth has improved. At the same time, the text passage stating that the Fed is closely monitoring the global situation was left unchanged. This could be understood as an indication that the Brexit consequences for global economic growth and for the US economy are not yet foreseeable and that in view of this the Fed would prefer to wait before raising interest rates. The decision was not unanimous. Esther George, a self-confessed hawk, would have preferred to increase the rates at this FOMC meeting.
Fed demonstrates its willingness to act
Even though the economic outlook sounds significantly more positive than in the previous statement, the Fed was undecided about when exactly it intends to carry out the next interest rate adjustment. Evidently the Fed members have not yet reached a unanimous opinion about the correct timing of a renewed tightening of monetary policy. If the September target date were already a foregone conclusion, the US Central Bank would certainly have given more concrete indications of an imminent interest rate adjustment. However, the improved economic outlook has raised expectations in the financial markets that the Fed funds target rate could perhaps indeed still be increased this year. Following the press release market participants have therefore slightly raised their expectations of an interest rate increase for September. Currently Fed funds futures imply a probability of 26.4% of higher interest rates in September. On the whole the financial markets hardly reacted to the release of the communiqué. On 26 August the Fed chief will take the microphone at the central bank meeting in Jackson Hole. If interest rates are to be higher in September already, the Fed chief would have to make a clear commitment then at the latest. Until then the order of the day is: monitor the data and wait. We stand by our opinion and do not expect to see higher interest rates this year.