The crowd is buzzing over the possibility that the Federal Reserve may be considering negative interest rates. Where did that notion come from? Well, from the horse’s mouth. As noted earlier, an unnamed FOMC member recommended—for the first time in Fed history in terms of a formal, public document—that the central bank’s policy rate be set slightly below zero for this year and in 2016, as per two dots in yesterday’s dot plot (see chart below). It’s an idea that seems to be catching on… again. The Bank of England’s Andy Haldane just outlined the case for going negative in the UK.
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Yesterday’s verdict by the Federal Reserve to leave its policy rate unchanged at the zero-to-0.25% target–a policy that’s been in place for six years–has inspired speculation that the European Central Bank (ECB) will be forced to up its game with monetary stimulus. The crowd certainly appears to be making bets in that direction–Bloomberg reports that European bond prices surged today in reaction to yesterday’s announcement in Washington. Why? Laurence Mutkin, global head of Group-of-10 rates strategy at BNP Paribas, advises that the Fed’s dovish decision has ramifications for the ECB. “We think during the fourth quarter [the ECB’s] going to announce an extension of QE,” he explains.
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Economic reports in recent weeks suggest that the growth trend for the US has decelerated, but the softer numbers in the aggregate still fall short of reflecting substantially higher recession risk. The outlook is moderately darker from the vantage of financial and commodities markets, but for the moment there’s no clear sign that a downturn is imminent via the economic numbers overall.
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The Fed punted on raising rates yesterday, but that didn’t stop it from raising its estimate of GDP growth for 2015… slightly. The median projection for this year has been tweaked up to +2.1% from +1.9% in the June outlook. The modest increase in projected growth looks a bit odd in the context of leaving the target rate for Fed funds unchanged at zero-to-0.25%. But all becomes clear when we review the Fed’s assumptions for 2016.
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● What will it take for the Fed to raise rates? | AP
● Fed decision gives emerging markets “breathing room” | Bloomberg
● Will the Fed ever raise rates? | Reuters