special reports

US Fed - Hawkish FOMC Will Likely Leave Rates Unchanged In September

Tuesday, 07 August 2007 19:07:42 GMT  |  Terri Belkas, Currency Analyst

As expected, the FOMC left rates steady at 5.25 percent, but by continuing to say that “the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected”, markets are slashing estimates for rate cuts in the near-term. Furthermore, the FOMC also noted that the economy seemed likely to expand in coming quarters, offering no relief for US equity markets as St. Louis Fed President Poole said recently, the Fed’s fundamental objective is to ensure price stability.

US Fed – Hawkish FOMC Will Likely Leave Rates Unchanged In September
PBOC – Yuan Reform At Their Own Pace
BOJ – Politics May Weigh Just As Heavily On Rate Decisions As Inflation


Yield Spread Analysis 07/31 – 08/07

Globally, government bond yields plummeted over the past week as risk aversion permeated throughout the markets and drove up prices. In recent days, flight-to-quality has subsided somewhat, while the Fed’s continued focus on inflation on Tuesday helped provide a boost to yields. However, greater downside risks to growth and speculation that the central bank will be forced to cut rates next year leaves the US yield curve inverted. In Europe, ECB President Trichet’s use of the term “strong vigilance” following the bank’s August policy meeting led markets to believe that a September rate hike is in the cards.

Looking ahead, the RBA decision could shake up Australian bonds, but this will be dependent mostly upon the bank’s policy statement, as a neutral stance could actually lead yields lower.

US Fed – Hawkish FOMC Will Likely Leave Rates Unchanged In September

As expected, the FOMC left rates steady at 5.25 percent, but by continuing to say that “the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected”, markets are slashing estimates for rate cuts in the near-term. Furthermore, the FOMC also noted that the economy seemed likely to expand in coming quarters, offering no relief for US equity markets as St. Louis Fed President Poole said recently, the Fed’s fundamental objective is to ensure price stability:

William Poole, St. Louis Federal Reserve President

“The Fed doesn't know, and market participants do not know either, the full implications of last week's stock market declines and increases in risk spreads. The market understands, I believe, that the Fed will act in due time if and when evidence accumulates that action would be appropriate. Most of these upsets stabilize on their own, but some do not. I'm not saying that the Fed should ignore what happened last week - we need to understand what is happening. The Fed should respond to market upsets only when it has become clear that they threaten to undermine achievement of fundamental objectives of price stability and high employment, or when financial-market developments threaten market processes themselves.” – August 1, 2007

Ed Lazear, Chairman of the White House Council of Economic Advisers

“Job growth continues, even in a period during which we are seeing some changes in the US economy.” – August 3, 2007

PBOC – Yuan Reform At Their Own Pace

On August 2nd, the US Senate Banking Committee voted 17-4 in favor of a bill that tightened the government's definition of currency manipulation – a clear jab at China – which requires the Treasury Department to make that finding against any country that has both a material global current account surplus and a significant trade surplus with the United States. It also instructs the Treasury to determine currency manipulation without regard to a country's intent, however, the vote has not gone over entirely well:

Henry Paulson, US Treasury Secretary

“Legislation would be counterproductive and would undermine what we're trying to do here.” – August 2, 2007

Robert Kimmitt, US Deputy Treasury Secretary

“I don't think there is any question that that is the goal that the Chinese are pursuing. I don't think we have any difference as to goal or direction…the difference is in pace…We think that it is China's interest first and foremost, the regional economy and the world economy for China to move quicker.” – August 3, 2007

Jin Renqing, China Finance Minister

“China must perform our reforms in the exchange regime. We will not follow other's words on exchange reform, but will take into account the impact on the domestic and global economy.” – August 3, 2007

BOJ – Politics May Weigh Just As Heavily On Rate Decisions As Inflation

In a clear display of conflict, LDP Secretary General Hidenao Nakagawa – who is under pressure to resign – directly blamed previous Bank of Japan rate hikes for the LDP losses in the recent upper house election, saying that the bank left the government unable to achieve its growth target. While the central bank is an independent entity, such pressure could prevent them from raising rates in the near-term:

Toshihiko Fukui, Bank of Japan Governor

“The Bank of Japan manages policy with the goal of business recovery and price stabilization…Japanese businesses have experienced pressure seen in other advanced nations…as well as higher oil prices.” – August 7, 2007

However, fiscal officials remain optimistic regarding growth prospects:

Hiroko Ota, Japanese Economics Minister

“There were some economists saying that the economy was entering a soft patch. The latest data underscored that economic conditions remained the same as before.” – August 7, 2007

Koji Omi, Japanese Finance Minister

“When we think of deflation, we think of a situation where the economy is in a bad and undesirable state. But in reality, the economy is recovering steadily amid stable prices.” – August 7, 2007

Written by Terri Belkas, Currency Analyst

Resources

• free demo account
• forex courses
• open an account
• real time news
• free webinars