Published: Fri, July 28, 2017
Markets | By Erika Turner

Asia report: Markets higher as Fed stands pat

Asia report: Markets higher as Fed stands pat

"The Fed is sticking to its plan for the gradual reduction of accommodation but it will need a pick-up in U.S. data to convince the market that 2017 will see a third rate hike", said Lee Ferridge, head of multi-asset strategy for North America at State Street Global Markets.

In its statement, the Fed said job gains since the last meeting have been "solid" and that household spending and business investment have "continued to expand".

The recognition of soft inflation added to expectations that the Fed's plan to raise interest rates a third time this year might be delayed.

Global markets advanced and the dollar fell Thursday after the Federal Reserve's latest policy statement damped expectations for US interest-rate increases. However, they will be keenly looking for any indication of when the winding-down of its Dollars 4.5 trillion balance sheet might begin.

The dollar index, a measure of the greenback against a basket of six major currencies, was at a 13-month low, while US Treasury prices gained after the Fed's policy statement was perceived to be dovish. Inflation as measured by the Fed's preferred measure, "core" consumer expenditure deflator, has fallen from 1.8 percent at the start of the year to a current rate of 1.4 percent.

The Fed also said it expected to start winding down its massive holdings of bonds "relatively soon", cementing expectations of a September start.

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But in June, the Fed said that, at some point in the near future, it plans to let US$6 billion a month in treasuries mature without reinvestment, and then increase that amount to up to US$30 billion.

But Innes stated that such hint from the Fed is not that big of a shock and might not help much in lifting the U.S. dollar adding that it will be the inflation language where a potential dovish shift will appear. But tweaks in the Fed's statement indicated that policy makers have grown more concerned about a recent slowdown in inflation.

Fed officials cut short-term interest rates to almost zero during the 2007-09 financial crisis to boost investment and growth.

So, steady as she goes on steadily normalizing interest rate policy, at least until the data show more sustained inflation weakness or a dramatic labor market tightness.

Analysts also pointed to technical trading levels that were breached once the dollar began to fall, triggering more selling and a further decline in the greenback. But I believe the latest Fed statement would not bring any surprises to the market, including the economic outlook and timeframe to change the balance sheet.

BBDXY drops to as low as 1,155.07; oil slips 0.2%.

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