The U.S FED statement of Wednesday deleted the word patience and the markets responded.
It appeared to the markets that the FED is closer to providing an interest rate hike as the central bank issued its economic growth statement based on information since January.
Key points regarding the U.S economy:
Labor market conditions have improved further
Strong job gains and a lower unemployment rate
Range of labour market indicators suggests that underutilization of labor resources continues to diminish
Household spending is rising moderately; declines in energy prices have boosted household purchasing power
Business fixed investment is advancing
Recovery in the housing sector remains slow
Export growth has weakened
Inflation has declined further below the Committee's longer-run objective, largely reflecting declines in energy prices
Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable
The dual mandate of maximum employment and price stabilization is the FED’s aim; Tuesday’s statement notes that this is attainable through economic activity expanding at a ‘moderate pace’. In terms of the interest rate, it ‘is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term.’ The FED has not ‘decided on the timing of the initial increase in the target range’ but asserts that it is ‘unlikely’ at the next meeting in April. All this was however, irrelevant for the markets as all eyes were on the word ‘patience’ that has been used consistently over the last year to describe the bank’s attitude to an inflation increase.
The word did not appear in Wednesday’s statement and the markets reacted in the following ways:
A huge buy up of stocks saw U.S indices climbing: USA30 [Dow] rose from 17607 to a fresh record high of 18000
USD fell against a basket of currencies but is recouping losses in Thursday morning’s Asian trading
Short-term U.S. yields, notably the US10YNote felt the biggest drop in six years
The reverse in many of the movements felt on Wednesday comes as the markets stabilize, understanding that the FED is willing to allow unemployment to fall further before hiking the interest rate.
MT4 Chart: USA30 [Dow]
MT4 Chart: EURUSD
MT4 Chart: US10YNote
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