The decision of the Federal Reserve (Fed) to avoid announcing imminent cuts of interest rates despite the incessant political pressure underlines its prevailing caution and forced investors to moderate their expectations of flexibility at the next monetary policy meeting.
The Federal Open Market Committee (FOMC) maintained interest rates on Wednesday in a divided decision that offered few indications on when the loans could be reduced. He also generated discrepancy between two governors of the Fed, both appointed by President Donald Trump, who coincide with him that monetary policy is too restrictive.
The reference interest rate to one day, controlled by the Fed, remains in a range of 4.25 to 4.50%. The last type cut was in December and the FED increased them from March 2022 to July 2023 to combat inflation.
The lack of a clear sign that the Fed was inclined to cut interest rates at the next September meeting raised the yields of the treasure bonds and the dollar in the last operations and caused a fall in the shares.
“I think the Fed has postponed the probability of a rate cut,” said Sonu Varghese, Carson Group global macroeconomic strategist.
“They will wait for more data, but more data means more time, and more time means that rates will remain restrictive for a few more months,” said Varghe.
Federal funds operators estimate a 46% probability of a rate cut for September, compared to 65% a day ago, indicates the CME Group Fedwatch tool.
They no longer foresee two complete cuts of 25 basic points by the end of the year, as was the case in recent days.
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Reluctance of the Fed to cut rates forces the market to rethink the prospects
The president of the FED, Jerome Powell, kept his options on monetary policy open. “We have not made decisions about September,” he said at a press conference. He also noted that there is still time to analyze a wide range of data before the next meeting of the Central Bank in mid -September.
“There was the possibility that (Powell) discreetly indicated that a rate cut in September is the base scenario, and that this would only happen if the data did not develop consistently with it,” said David Seif, chief economist of developed markets in Nomura in New York.
“I would say he didn’t do it at all.”
Bond yields rose on Wednesday, since Powell reiterated that the economy shows resilience despite the fact that interest rates remain “moderately restrictive.” The yields of the 10 -year reference treasure bonds have already risen approximately two basic points after these statements.
The positioning of investors could have amplified the reaction of the bond market, said Jamie Patton, co -director of global rates in TCW.
“I think the market came a little when we thought that we already had enough data to justify a cut in September,” said Patton, who remains optimistic about short -term bonds due to the expectations of imminent cuts in interest rates.
Investors will have to follow inflation analysis without rate cuts
Powell has been under intense pressure from the White House to lower interest rates, and President Trump has repeatedly criticized him for his slowness to reduce loan costs.
Powell’s reluctance when indicating when the Fed could begin to cut the fees will force investors to analyze two more months of inflation and employment data to determine the moment of the flexibility of monetary policy, which will exert some pressure on small shares of short -term capitalization, investors point out.
The Russell 2000 index of small capitalization, which had surpassed the S&P 500 the day before Powell’s intervention, closed the session with a 0.47% drop, compared to a loss of 0.12% of the large capitalization reference index.
For the dollar, which has been under intense selling pressure this year, the relatively aggressive message of the Fed gave some support, promoting the currency to a maximum of two months in front of a basket of similar currencies. The dollar index closed with a rise of 1%, which leaves it with a fall of around 8% so far this year.
“We still foresee a medium -term weakness for the US dollar, but in the short term the risk profile is more bidirectional,” said Bofa Global Research strategists in a note.
The increase in rates in the US helps to increase the attractiveness of the dollar in relation to other developed market currencies.
“This patience of the Fed and the strength of the US economy that is consolidating are slowing down the depreciation of the dollar,” said Vishal Khanduja, director of Fixed Income of broad markets at Morgan Stanley Investment Management.
Khanduja, however, warned that the market reaction to the Fed meeting should not be interpreted too much.
“In general, I think they did not change their position at all,” he said.
Khanduja awaits three to five cuts by the end of next year, although it considers important two inflation data.
“They will continue waiting to see what happens, very convinced that inflation will be slightly higher in the next two data,” he concluded. “But they are still very convinced that it will be a unique increase.”
With Reuters information
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