Here’s what you need to know
Fed chair, Janet Yellen is prepared to act at any of the eight scheduled meetings taking place during the year. In recent times, the Fed has reserved its policy decisions to the four annual press conferences.
Analysts typically don’t place too much stock in the other meetings without press conferences. Heading into the Wednesday, July 26, 2017 meeting, it was business as usual.
Market participants did not expect any surprise announcements, and it showed in the way the USD traded against its peers on the day.
The US dollar index (DXY) was hovering around 94.09 on Wednesday, close to its 52-week low of 93.82. For the year to date, the DXY is down 8.1 per cent, and down 4.80 per cent over the past three months.
The cable tightens on the back of UK GDP news
The GBP/USD pair is trading at 1.3089, up 0.47 per cent or $0.061. The pair is holding above the 50-day moving average of 1.289, and the 200-day moving average of 1.258. The GBP/USD pair rallied above the 1.300 handle, with net-short client sentiment, and a mixed outlook. The release of UK GDP data assuaged concerns to a degree, given that the UK economy grew at 0.3 per cent in the second quarter.
Across the Atlantic, there was less concern about the outcome of the Fed decision, since most traders did not expect the Fed to pull the trigger. However, the Fed’s outlook on the economy will drive trading sentiment. A subdued USD has helped the GBP/USD pair to rally. President Trump’s plans to repeal and replace the Affordable Care Act have fallen flat, with most senators voting against such a move.
Hawks at the Federal Open Market Committee (FOMC) did not get their way as the benchmark interest rate – the Federal Funds Rate – remained intact.
Fed to unwind massive balance sheet ‘relatively soon’
The big news for the US economy is that the Fed will begin unwinding its $4.5tn balance sheet in short order. Details of the Fed’s statement indicate that moderate improvements in the economy have taken place, with solid job gains, coupled with lacklustre inflation growth.
The Fed has targeted an inflation rate of two per cent, but current inflation levels are running significantly lower than that. As such, the FFR will remain in the region 1.00 per cent – 1.25 per cent. Normalization of the Fed’s balance sheet will take place ‘relatively soon’ according to Yellen, on the proviso that the US economy continues to perform well.
The two-day meeting of the Fed culminated in the decision to maintain interest rates at their current level. The Fed has hiked interest rates multiple times since December 2015, and this is already filtering through from Wall Street to Main Street in the form of higher rates for savers and borrowers.
It remains unclear when the Fed will begin selling its mortgage-backed securities to lighten its balance sheet.
The most important take away from the recent meeting, for the USD is the personal consumption expenditures index. It has been moving further away from the target figure of two per cent for several months.
The price of crude oil is a big part of the reason inflation remains low. However, OPEC has successfully reined in member countries to reduce their production of crude oil, closer to the drawdown target of 1.8m barrels per day. As such, oil prices are now hovering around 2-month highs.
Inflationary pressures slowly building as debt levels rise
US crude oil inventory levels have plunged in recent weeks, and this helped to raise prices of both Brent crude oil and WTI crude oil by Wednesday 26 July.
Brent crude oil broke the critical $50 per barrel level and was trading at $50.80 by 2 PM EST, while WTI crude oil futures for delivery in August rose to $48.57 per barrel. Rising inflation is a double-edged sword.
If the Fed must contend with high inflation, it will raise the FFR yet again. This will invariably filter down to Main Street where consumers will have to pay the price.
Consumers and businesses are dealing with debt differently. According to the latest data, the total debt owed by Americans is $779bn. Credit card debt is a problem that affects every US household. The interest repayments on debt (December 2016) amount to $1,300 per annum. The reason Fed rate hikes and debt are related is clear: A rate hike makes the cost of credit more expensive and threatens to increase the debt burden.
The total debt owed by American households on credit cards on average is $16,748, on mortgages is $176,222, on auto loans $28,948, and on student loans $49,905.