As many had anticipated the FOMC decided to keep US interest rates on hold this month. They remain at 1.25% for the time being. With more immediate importance being placed on the US’s Balance sheet a reduction begins as of next month. The statement provides a good amount of Pound Dollar Rate volatility despite the lack of Interest rate hike.
The rationale behind the omission of a rate hike this month was qualified early in the September’s statement with the Chair of the FED stating:
This accommodative policy should support some further strengthening in the job market and return to 2 percent inflation consistent with our statutory objectives.
Although FOMC members opted to keep rates unchanged at 1.25% the committee made it clear that an interest rate hike was just around the corner with the most likely month being in December.
In the near term, the FED will focus on incrementally reducing its $4.5TRL bond portfolio. Its strategy is to reduce their balance sheet by $10 Billion each month beginning in October. The FED plans to increase the amount it reduces in $10 Billion tranches until the point that it reaches $50billion which will them remain a continual process in order to reduce the $4.5Trl debt mountain.
In her latest statement, Janet Yellen also voiced her thoughts on the condition of the US Economy. She attributed much of the US’s strong jobs market to consumer spending. Yellen also discussed strong business investment and increased exports due to improving overseas economies.
She did, however, offer a precautionary note which concerned the third quarter. Stating that due to the disruption caused by hurricanes Irma and Maria and Harvey economic growth could be hampered; this being said Yellen remained confident this would return.
With Inflation lower than the Federal reserve banks target of 2% with the index currently sits at 1.4% which may be causing some concern for the FED. They do however believe the low inflation pickup is purely transitionary with Yellen affirming
‘’Such developments are not uncommon, and as long as inflation expectations remain reasonably well anchored, are not of great concern from a policy perspective because their effects fade away’’
In the week surrounding the FOMC meeting and accompanying statement Pound Dollar had experienced lows of 1.3477 and highs of 1.3603. Following Yellen’s statement, Pound Dollar fell from 1.3594 to 1.3478.
Whilst in the following days Sterling corrected many of its losses, it was hampered by another non-committal speech from Theresa May. Pound Dollar rate closed markets on Friday and currently sits at around 1.3510.
Elsewhere the Euro-Dollar rate reacted in a similar manner seeing the currency pair fall from 1.2012 to 1.1881. As with the Pound Dollar rate, euro has clawed back many of the losses, exposing a clear lack of confidence in the Dollar. The Euro-Dollar rate closed Friday trading at 1.1957.