A busy night for central bankers as the Federal Reserve and the Bank of Japan announced their latest interest rate decisions. As is often the case these days the decision its self is often well flagged, it’s the accompanying statements that gain the most focus. Taking the Federal Reserve first, the statement appeared very non-committal as the officials offered little in the way of guidance for the coming months. On this occasion more seemed to be read into what they did not say rather than what they did say. As was the case with the last months statement the Federal Reserve referred to the stronger employment data against the weaker macro backdrop. To illustrate this point, on Thursday the Labour Department announced its estimate of first quarter GDP growth of 0.5%, below expectations of 0.7%.
There have been seven times since 1926 when the Federal Reserve have raised rates once, on several they have followed it with a cut in the coming quarters. We have speculated in this piece in the past that the Fed’s next move could be down and not up. US 10-year treasury yields have fallen steadily since the start of the year, showed little reaction to last night’s statement. When a interest rise has been followed by a cut asset prices have generally risen.
Moving onto the bank of Japan, in light of the strength of the Japanese yen there was some expectation the Bank of Japan might have added new measures to halt the rise. The Yen has risen over 10% against the US dollar since the start of the year, and rose again post the Bank of Japan’s announcement. When questioned officials seemed to suggest that the Bank wanted to wait for the effect of negative rates to take effect before considering further action.
Equity markets in Japan and the US reacted negatively to the reports from the respective central banks. Once they digest the statements investors may well come to the conclusion once again that the Federal Reserve are in no hurry to raise again. The Bank of Japan, despite Thursday’s inaction may well do something in the coming months. The ECB continue to float the idea of further stimulus measures, and we remain in a world of modest growth, negligible inflation and minimal interest rates.