The US Federal Reserve’s post-meeting statement looked bullish at first glance, saying it would continue its current bout of bond-buying until the US economy improved, with interest rates remaining at the current record low of 0% to 0.25% for at least the next two years, and yet the market reaction was muted.
The Fed virtually said the ‘free’ money would keep flowing – the billions of cash that have powered the IPO boom, the surge in asset prices like property, and bolstered the performance of a string of major companies.
And for the growing band of silly inflationistas in the US and elsewhere, not a hint of any concern. In fact, the Fed again made it clear that interest rates will remain low until jobs (as presumably growth and inflation) is unquestionably strong.
“The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.”
That means interest rates on hold until the end of 2023 at the earliest.
The Fed upgraded its economic forecasts for 2022, especially unemployment, but it also acknowledged the primacy of the battle to control the coronavirus as the central bank moved to support the economy through the current uncontrolled wave of infections and deaths.
The Fed said it would keep buying at least $US120 billion of debt until “substantial further progress has been made” in the economic recovery and that it would now tie those monthly government bond purchases to that same goal.
Wall Street remained mixed to start with but started a guarded rise in the final hour of the session. The Fed’s statement actually confirmed the growing view the US economy is weaker than previously thought because of the commitment to maintain current interest rates for another two years.
Nasdaq hit a new all-time high on a rotation back to internet ’safe’ stocks such as Apple. Gold prices settled virtually unchanged ahead of the Fed statement, but rose by around $US10 an ounce afterward.
Overnight trading though on the ASX futures market saw a 31 point gain for the ASX200 later this morning by 7.30 am. The Aussie dollar touched 75.75 US cents, a two year plus high.
Bond traders took their time but eventually yields dipped in the wake of the Fed statement – the 10% yield turned a touch lower after the market has been looking to send it higher on misplaced worries about inflation.
That view was supported by a surprise 1.1% fall in retail sales in November – which is when the current surge in virus cases and deaths accelerated into the US winter.
The fall – the second monthly dip in a row was blamed on the new COVID-19 infections and falling household income. October’s 0.3% rise was revised down to a fall of 0.1%, a major shock for economists and markets.
US Congress – led by Republicans are dragging its heels on sorting out a new stimulus package – it will be smaller than the $US904 billion revealed last week – and will contain less help for unemployed workers.
Many US economists say the two weak month for retail sales is the strongest indication that more money is needed from the government and the rollout of coronavirus vaccines will probably not stop the economy from sharply slowing down and even contracting in the first quarter of 2021.
“The economy is hitting a very rough patch,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania told Reuters.
“Although widespread vaccine distribution will support stronger economic growth by mid-2020, conditions will remain soft until then.
October saw falls in most sectors – the drop was led by a 1.7% drop in sales of motor vehicles after being unchanged in October. Sales through clothing stores plummeted 6.8%. Consumers also cut back on eating and drinking out. Sales at restaurants and bars dropped 4.0%.
Sales at electronics and appliance stores fell 3.5% and receipts at furniture stores declined 1.1%. There were also decreases in sales at sporting goods, hobby, musical instrument and book stores.
But receipts at food and beverage stores rose, as did those at building material stores – they have been doing well throughout the pandemic (as they have been in Australia).
The weak consumption data for the first two months of the December quarter saw economists re-work their growth estimates – still positive, but not by very much.
The falls in sales in October and now November make it easier to understand the guarded nature of the Fed statement.
