- Interest rate unchanged, but Fed signaled possibility of hike by year end
In the U.S. the most important economic development last week was the Fed's interest rate decision announced on Wednesday.
The Federal Open Market Committee (FOMC) decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent.
"The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives," the FOMC announcement read.
The decision to wait was far from unanimous as it passed by a vote of 7 to 3, the narrowest margin in almost two years. Kansas City Fed President Esther George, Cleveland Fed President Loretta Mester and Boston Fed President Eric Rosengren defended raising the target range to 50-75 basic points (bps).
Even though, the Fed's doves were able to take the pressure from hawks in the meeting, they signaled that a year-end rate hike is very likely through the following three steps:
1. The post-meeting statement said "Near-term risks to the economic outlook appear roughly balanced." The Fed had used the same language in its FOMC announcement last October before increasing interest for the first time in seven years in December 2015.
2. According to quarterly released economic projections, the median expectation for the year-end federal funds rate by 17 FOMC member is now 0.6 percent, suggesting just one rate increase this year, versus expectations for two after the June meeting.
3. In a press conference following the FOMC meeting, Fed Chair Janet Yellen said "I would expect to see a rate increase this year if we continue on the current course of labor market improvement, and there are no major risks that develop".
- Market rally cut off by decline in oil prices
The Fed's decision to hold the benchmark interest rate steady and lower the expected pace of future increases were welcomed by U.S. financial markets. All major indexes rallied on Wednesday and Thursday and Nasdaq hit record high levels.
On Friday, however, markets changed course as oil prices fell sharply due to a report by Saudi Arabia which said a decision to freeze production is unlikely at the upcoming OPEC meeting.
Brent and crude oil depreciated by almost 4 percent on this news and NYSE closed with losses.
The dollar also completed the week lower despite the Fed's strong hint of a rate hike over the next months. Moody's Analytics Chief Economist Mark Zandi explained to Anadolu Agency that the downward movement in the dollar was a result of the growing gap between the Fed and the markets.
"The Fed's communication weakened this year and there is a big gap between the Fed and the markets. The markets do not believe that the Fed will do the things it says it will and they have good reasons to do so," he said.
- Mixed data continues to raise questions of economic outlook
Initial jobless claims fell by 8K to 252K, in the September 17 week significant as it is also the sample week for the monthly employment report. The claims were at the lowest level seen in two months. Existing home sales fell from a monthly 0.9 percent in August to a 5.33 million annualized rate, marking the lowest level in the last six months. In addition, the flash PMI Manufacturing Index for September came in at 51.4 showing the weakest expansion in the last three months.
- Busy week ahead: Fed officials, GDP, PCE price index
This week, ten Fed officials including Janet Yellen are expected to speak. Yellen will testify before the House Financial Services Committee on Wednesday, Sept. 28 and speak at a Kansas City Fed forum on Thursday, Sept. 29.
The data calendar for the week is also busy. The GDP revision for the second quarter and PCE price index for August will be key for markets. Other data releases include personal income and outlays, consumer confidence, new home sales, durable goods orders and jobless claims.