Yesterday the FOMC left the federal funds target rate unchanged at 5-1/4 to 5-1/2. Key changes were made to the text of the policy statement compared to the previous rate announcement, but the Fed didn’t deliver on the dovish shift that many expected. Notable additions were: ‘The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.’; and ‘The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.’
The probability of a rate cut at the FOMC’s March meeting is now 40%, 94% in May, 111% in June, 95% in July, and 101% in September.
The dollar weakened in the immediate wake of the rate announcement, but recovered through the end of the trading day, leaving the dollar index with a loss of only 0.14%. The dollar recovery continued overnight, lifting the dollar +0.28% today. Dollar gains include +0.56% vs. AUD, +0.45% vs. SEK, +0.23% vs. NZD, +0.15% vs. GBP, and +0.06% vs. CHF.
The Bank of England left its policy rate unchanged in today’s rate announcement. No change was widely expected, and the initial sense is that the BoE needs more evidence that lower inflation is sustainable before cutting rates, similar in tone to the Fed.
U.S. Treasury yields are lower in all tenors in a general decline between 0.03%-0.04%.
Equities have opened higher but remain well below pre-FOMC decision levels. The likelihood of no imminent rate cuts translates into continued high borrowing costs for businesses, dragging down equity valuations.
The Change in Nonfarm Payrolls takes center stage on tomorrow’s economic calendar. The estimate is for a 185k increase compared to the 216k for December.
