FOMC policy meeting kept interest rates unchanged
The two-day FOMC (Federal Open Market Committee) meeting ended on July 27, 2016. As widely expected, the Fed kept its overnight interest rate target in the 0.25%–0.5% range. This is the fifth consecutive meeting that the Fed has kept the rates unchanged amid global economic uncertainty. After the meeting, Treasury yields fell across the yield curve. ETFs such as the iShares 10-20 Year Treasury Bond ETF (TLH) and the iShares 20+ Year Treasury Bond ETF (TLT) rose.
According to the FOMC policy statement, “the labor market strengthened and that economic activity has been expanding at a moderate rate. Household spending has been growing strongly, but business fixed investment has been soft. Inflation has continued to run below the Committee’s 2% longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports.”
The Fed also mentioned that “near-term risks to the economic outlook have diminished.”
Hopes of a rate hike in 2016 are still alive
The FOMC policy statement mentioned that “the Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen.”
It also stated that “the committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”
The Fed might go ahead with a rate hike if economic data keep moving upwards. However, the pace of the rate hike will be gradual no matter how the domestic data pan out. The Fed is quietly following the global bandwagon of keeping interest rates lower for a longer time in the wake of the Brexit vote.
In the next part, we’ll look at how the Treasury notes auction fared last week.