Fed Keeps Rates On Hold For Now

The main event of the night was the FOMC meeting at which Janet Yellen announced rates would be kept on hold for the time being however she signalled that a rate hike may occur in December, bringing rates to 1.25%. According to the CME rate tracker, the probability of a rate hike before the end of the year is now 73%, up from 47% just a week ago. Furthermore, the process of reducing the Fed's balance sheet will start in October although the rate will only begin at around $10bn per month. At that rate, it would take approximately 35 years to reduce the balance sheet to zero so to say it is a gradual process is an understatement although the rate is scheduled to increase to up to $50bn per month. Although the process isn't on auto-pilot, it would take a significant deterioration in the economy for the run-off to be stopped. Market participants will be watching the bond market over the next few months as the balance sheet reduction process will surely place upward pressure on bond yields. This could potentially push rates up in other parts of the economy.

Although the AUD fell sharply at the time of the FOMC announcement, it had been rallying prior to that such that the fall only brought the level back to where it was one day earlier. Since then it has bounced off these lows and is now holding comfortably above US$0.80. This strength will probably frustrate the Reserve Bank of Australia (RBA) as it considers the level of the AUD too high. The prospect of higher rates in the US should be putting downward pressure on the exchange rate. The stubbornly high AUD is a factor that will discourage the RBA from raising rates too soon.

Gold sold off sharply on the FOMC announcement although it found support at the $1,300 level. This level is resistance turned support and it will be crucial for gold bulls that this level holds. A break below $1,300 would open up further downside. Stocks, on the other hand, were largely unaffected by the announcement and even rallied somewhat in the last couple hours of trading to close slightly higher.  

Data Releases:

–    Japan Interest Rate Decision 2:00pm AEST

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This article was written by William O'Loughlin – Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via william.oloughlin@rivkin.com.au or by phoning +612 8302 3633.