The FED Leaves Interest Rates Unchanged

Dear PGM Capital Blog readers,

On Wednesday September 21, in a mostly expected move, the U.S. Federal Reserve decided not to raise interest rates at the September meeting of its Federal Open Market Committee (FOMC). The committee’s two-day meeting concluded with Fed officials voting to keep the U.S. central bank’s target range for the federal funds rate at 0.25 to 0.5 percent.

Below chart shows the FED fund rate from 2003 up to now.

HIGHLIGHTS:
Here below are some highlights of Federal Reserve Chair Janet Yellen’s press conference on Wednesday following the end of a two-day meeting of the U.S. central bank’s policy-setting committee.

The following are the highlights of Federal Reserve Chair Janet Yellen’s press conference of Wednesday following the end of a two-day meeting of the U.S. central bank’s policy-setting committee:

• Wage Growth:
  The FED thinks that the USA Economy has seen some modest pickup in wage growth and that it’s running a little bit higher than it was over the last two years. However, they do expect the unemployment rate to decline further and the labor market conditions to improve in the country.
  They also hope and expect that the USA will see some further pickup in wage growth and that it will be broadly beneficial to the American households.
•  
• Productivity Growth Slowdown:
  The FED thinks, that what ultimately drives inflation are both wage and price growth, related to tightness in the labor market and pressure on resource utilization.
•  
• Decline in business spending:
  The FED chairwoman stated that, investment spending has been quite weak for some time and they are really not certain exactly what is causing that.
  The FED is aware that a part of this decline is due to the huge contraction in drilling activity associated with falling oil prices, but the weakness in investment spending extends beyond that sector.
•  
• Credibility and revisions of forecasts:
  The FED chairwoman, stated that the FED agree that they are undershooting their inflation goal and that they want to make sure they stay on a course that raises that to 2 percent, and they’re struggling with a difficult set of issues about what is the new normal in this economy and in the global economy more generally, which explains why they keep revising down the rate path.
•  
• On the US Economy:
  According to the FED, the US economy has a little more room to run than might have been previously thought.
•  
• Rate Outlook:
  The FED judged that the case for an increase has strengthened but decided for the time being to wait for further evidence of continued progress toward their objectives.

PGM CAPITAL ANALYSIS AND COMMENTS:

The FED downgraded its forecast for economic growth in 2016 for the third time this year. It now projects growth this year to be 1.8%. In June it forecasted a growth of 2% for this year.

The FOMC raised interest rates for the first time in nearly a decade last December.

As the FED has hesitated to raise rates this year, there is a growing debate about its credibility. Many economists and investors say the FED’s hesitancy to raise rates – and conflicting messages from its top leaders – has eroded public confidence in the central bank.

If the FED wants to raise interest rates in 2016, there are only two FOMC meetings left before the end of the year, the first one will be on November 1 and 2, and just one week before the USA presidential election and the other one, the last one for this year, on December 13 and 14. The odds for November hike are to near 22 percent, while the probability for December hike is still around 60 percent.

The FED has two objectives when it makes its interest-rate decisions namely:

• Reaching full employment.
• Achieving an inflation rate of 2 percent.

The big question is, when will the conditions finally be right for the FED to raise rates. Expectations matter when it comes to FED decisions, because monetary policy changes the cost and availability of money.

Though the FED weighs many factors regarding the domestic and global economy in its interest-rate decisions, the committee’s moving goal posts have economists and analysts wondering what it will take for a rate hike to happen.

Gold:
As can be seen from below chart, Gold prices were markedly higher last week with the yellow precious metal up 2.26% last week and to close at 1,337.20 an Troy Ounce in New York close on Friday September 23.

The rally marks the largest weekly advance since mid-June & the largest weekly range since late-July and comes amid a sharp pullback in the greenback, prompted by Wednesday’s Fed interest rate decision.

Last but not least, before following any investing advice, always consider your investment horizon, risk tolerance and financial situation and be aware that markets can remain longer irrational than that you can remain solvent and that prices of precious metals and the stock of their producers might be very volatile and that sharp corrections may happen in the short term.

Until next week.

Yours sincerely,

Eric Panneflek