The Federal Reserve on Wednesday indicated it will be keeping its rate at 0 to 0.25 per cent for some time, expecting to maintain it until it is confident the US economy has weathered the crisis and is on track to achieve its maximum employment and price stability goals.
The declaration came after the Federal Open Market Committee’s (FOMC) two-day meeting, the Fed’s first meeting since last year.
“The ongoing health crisis will weigh heavily on economic activity, employment and inflation in the near team, and poses considerable risks to the economic outlook over the [medium-term],” the Fed stated.
A dot chart showing the expectations of members of the Fed around when the funds rate would rise, showed most believed it remains at zero until reaching 2.5 per cent at the end of 2022.
Nigel Green, chief executive of financial consultancy deVere Group, said the decision to hold the rate had been expected.
He added the “backstop” from the Fed has slashed the threat of a second market slump even if economic data is worse in the next quarter.
“It provides something of a floor for equities,” he said.
“As a result of this, investors will be seeking to further [top up] their investment portfolios to get ahead at lower entry points, before the hike in values that would [kick in] with another round of stimulus.”
The Fed has signalled it believes the economic outlook for the rest of the year will be tough. It expects US GDP to contract by 6.5 per cent this year and unemployment to reach 9.3 per cent.
As noted by BlackRock chief investment officer of fixed income Rick Rieder, it is clear the central bank “believes that a greater degree of help from fiscal authorities would aid the economy a great deal and that monetary policy by itself isn’t sufficient”.
“But it will continue to purchase government-backed debt at least at the current pace and the markets believe this will be further increased in order to maintain smooth market function,” Mr Green said.
“This will support and likely boost asset prices moving forward. Investors will now be eyeing the opportunities before any fresh or enhanced stimulus packages are announced.”
Kerry Craig, global market strategist at JP Morgan Asset Management noted lower rates have supported equity markets by improving stocks’ relative attractiveness to bonds, but they have created problems for banks as net interest margins are squeezed.
“The pressure on banks may flow through to Asia as yields come down,” Mr Craig said.
“The Fed’s view also creates further downward pressure on the US dollar. The greenback has been sliding for the last few sessions as the growth outlook in the rest of the world has improved and investors move away from safe havens.
“The move lower in the dollar should be supportive of risk assets outside of the US.”
Stephen Miller, investment strategy consultant with GSFM weighed in, saying the RBA may be “casting a nervous eye” at the appreciating Australian dollar.
“In the past the RBA has implemented ‘smoothing and testing’ which in this instance would involve the purchase of foreign [currency-denominated] assets (such as US [treasury bonds]) and in doing so sell AUD and buy foreign currencies (the RBNZ has flagged doing precisely that through its [large-scale asset purchase – LSAP] – program so as to drive the NZD lower),” Mr Miller said.
“I doubt that the RBA would go down the RBNZ path but it might try some short-term intervention such as ‘smoothing and testing’ were it to see the appreciation of the AUD as being too much too soon.”
But he added among other factors, closed borders mean perhaps activity is not as responsive to currency levels.
The Australian dollar generally does well when risk sentiment is positive, having risen from its daily closing low of around 57 cents in late March to close to 70 cents currently, close to where it started the year.
