The Federal Reserve, during the meeting for the monetary policy on Wednesday, decided to meet the expectations of the financial markets and left unchanged the current interest rates. The Fed then, as well as other central banks, continued to cut the growth prospects and this will made the markets to focus only macroeconomic fundamentals.
The US economy is far from recovering while in several areas there are now obvious bubbles, first of all the one of Wall Street.
The recovery has not materialized and the economy, on the contrary, is losing momentum. The only answer of Janet Yellen and his colleagues is to delay indefinitely the appointment with the raise of interest rate until the economy and the labor market will not give stronger signals of recovery. In practice they do not have a really credible exit plan from QE and zero rates strategy.
The Central American Institute board was not so united on this decision than previous meetings. In the end, it was the ‘doves’ that prevailed leaving interest rates unchanged in the range of 0.25% -0.50%.
It seems that all other central banks do not know well how to act because of poor economic conditions and the bubbles created in different industries of the economy.
The extraordinary expansionary policies have become a normal strategy for central banks and the Federal Reserve is doing seriously in ‘monetizing government debt’.
The Federal Reserve yesterday cut its growth forecast GDP and stressed about the fact that conditions to raise interest rate have been strengthened.
The commission now expects GDP at 1.8%, down from 2% previously reported. The unemployment rate is fixed to 4.8%, up from the forecast of June at 4.7%. Inflation is estimated to 1.3%, down 1.4% from Jun.
Moreover, the soft US presidential election in November will certainly be a burden for the next moves of the institute led by Janet Yellen who is undergoing even the banks’ pressure to raise interest rates.
The rates at zero and the almost total absence of bonds with yield is reducing more and more the American banks’ profit margins (but more generally also of European ones) and this convinced the CEO of some institutions to call for a tightening of interest rates.
Fed’s decision immediately led euphoria on Wall Street, with the American lists that reported a sharp rise in yesterday’s session.
Euphoria was also poured on the European stock exchanges, although this could have a short life due to geopolitical changes on the horizon and above the precarious financial situation of banks. Financial markets, now addicted by the expansionary monetary policies, have celebrated: the basket of the Nasdaq-100 technology stocks has reached a new historical record.
About Forex and International stock markets, bond and equity markets will continue to benefit the attitude of the Federal Reserve, while the dollar will fall, but in moderation. According to some economists, the biggest beneficiary of all should be the emerging countries.
At this point, the Fed is likely to raise interest rates on the only meeting in December, but this will depend on macroeconomic data and on the mood of the markets. The four rise forecasts are now only a utopia and at this point American central bank, together with other central banks, is likely to lose all its credibility.