Wednesday, 26 July 2017

Fed expected to leave rates unchanged; balance sheet in focus

WASHINGTON (Reuters) - The Federal Reserve is expected to hold interest rates unchanged on Wednesday and possibly hint that it will start winding down its massive holdings of bonds as soon as September in what would be a vote of confidence in the U.S. economy.

The U.S. central bank will issue its latest rates decision following the end of a two-day policy meeting at 2 p.m. EDT. Economists expect the Fed's benchmark lending rate to remain in a target range of 1.00 percent to 1.25 percent.

That would mark another pause in the monetary tightening campaign that the Fed began in December 2015. The central bank has raised rates twice this year, including at its last policy meeting in June.

Wall Street analysts see little chance the Fed will announce the start of the wind down of its $4.5 trillion balance sheet. However, the Fed's policy statement may provide more visibility on when that might occur.

Citibank economists said in a note to clients that the Fed's rate-setting committee was more likely to say that the trimming would start soon. "(That would) signal that the committee plans to announce balance sheet reduction in September," they said in the note.

Reducing the balance sheet will unwind one of the Fed's most controversial tools used to fight the 2007-2009 financial crisis and its aftermath.

After pushing rates nearly to zero in a bid to boost investment and hiring, the Fed pumped over $3 trillion into the economy through purchases of U.S. Treasury securities and government-backed mortgage debt to further reduce rates. That program drew criticism from Republican lawmakers in Congress.

"The stock markets are generally of a view that the Fed is not in too much of a hurry to normalise monetary policy. So equities would be able to take this Fed meeting in stride if the Fed's statement is in line with such views," said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.

Federal funds futures implied traders saw the chance of a Fed rate increase in September at about 8 percent and a December hike possibility at 48 percent.

A more assertive policy message by the Fed, on the other hand, would likely lift U.S. yields and boost the dollar.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was little changed, but drew mild support after the S&P 500 .SPX climbed to an all-time high overnight on well-received results from McDonald's and Caterpillar in addition to bank share gains.

Australian stocks gained 1 percent with a smaller-than-expected rise in local inflation supporting views that interest rates will remain at record lows for some time to come. The Australian dollar slipped 0.5 percent to $0.7896 AUD=D4.

Japan's Nikkei .N225 added 0.5 percent after the dollar rallied against the yen JPY= overnight to pull away from seven-week lows.

Shanghai .SSEC shed 0.4 percent on lingering fears of further regulatory tightening, while South Korea's KOSPI .KS11 lost momentum after touching a record high the previous day and slipped 0.3 percent.

The dollar regained some ground against major currencies in the previous session after U.S. Treasury yields jumped the most in almost five months in response to Wall Street's rise and on reduced demand for safe-haven bonds. [US/]

But the greenback remained hobbled by uncertainty about the progress of healthcare reforms and the prospect of further delays for President Donald's Trump's ambitious stimulus and tax reform polices.

U.S. Senate Republicans narrowly agreed on Tuesday to open debate on a bill to end Democratic President Barack Obama's signature healthcare law, but it still faces significant hurdles.

Indeed, the first of many expected votes this week on repealing or replacing elements of Obamacare failed to get the 60 votes needed for approval Tuesday night.

The dollar has also been kept in check by political uncertainty as lawmakers investigate possible meddling by Russia in the 2016 presidential election and whether there was any collusion by Trump's campaign.

The euro was effectively flat at $1.1639 EUR=, pulling back from a two-year high of $1.1712 hit on Tuesday on a stronger-than-expected German Ifo business survey.

Expectations that the European Central Bank would begin phasing out its easy monetary policy sooner rather than later have supported the common currency this month.

The dollar index against a basket of major currencies was little changed at 94.143 .DXY, after managing to put some distance between a 13-month low of 93.638 plumbed on Tuesday.

The dollar was steady at 111.905 yen  after surging about 0.7 percent overnight.

"The dollar continues to lack clear direction against the yen. Uncertainty towards U.S. politics is capping the pair. But 'risk on' is also taking place in equities thanks to good corporate results, so dollar/yen is not headed for a big slide either," said Daisaku Ueno, chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities.

In commodities, crude oil extended its surge after jumping overnight on data showing a sharp fall in U.S. crude stocks last week.

U.S. crude rose 1 percent to $48.38 a barrel and Brent added 0.8 percent to $50.62 a barrel

Gold struggled as improved investor risk appetite curbed the precious metal's appeal. Spot gold XAU= was 0.15 percent lower at $1,246.52 an ounce following its ascent to a one-month peak of $1,258.79 on Monday.

Reference: Kim Coghill and Lisa Twaronite

No comments:

Post a Comment