The Federal Reserve announced on Wednesday that it will conclude its QE program at the end of this month.
This was in-line with market expectations, and now the countdown is on to the Fed’s first rate hike.
Amid recent volatility in the markets and declining future inflation measures, expectations for the Fed’s first interest rate hike got pushed from the middle of 2015, (read: June), to the third quarter of next year, or the September 2015 FOMC meeting.
But following today’s statement, the general feel on Wall Street is that the statement was “hawkish,” or implied that the Fed is looking to raise rates sooner than maybe the market expects.
In an email shortly after the announcement, Chris Rupkey, Chief Financial Economist at MUFG wrote that Wednesday’s statement shows that the first rate hike is coming sooner rather than later.
“‘Solid job gains,’ they actually said that,” Rupkey wrote. “Hallelujah, this sounds like a first. Unemployment is coming down and coming down for the right reasons. It sounds like they have capitulated and finally admitted there is real improvement in the economy out there…
It doesn’t sound like too low inflation is going to hold back the rate hikes next year either as the likelihood of inflation remaining below 2% is also diminishing even though they expect inflation near term will be held down by lower energy prices.”
Rupkey also notes that the lone dissenter this time around was the Minneapolis Fed’s Narayana Kocherlakota, who thought the Fed should keep its $US15 billion per month QE program in place, and Rupkey said this dissent “favours those in the early liftoff camp.”
But Rupkey’s central argument is that this is all about the labour market.
Recently, the market has been fixated on declining inflation expectations, but even with inflation expectations, Rupkey thinks that a strong labour market is going to see a Fed that looks to take action on interest rates.
“They are putting the market on guard here by saying if the data coming in show greater progress in meeting the Fed’s employment and inflation objectives, the increases in rates are likely to occur sooner than currently anticipated… Today’s statement shows the Fed believes the economy is nearing the final stages of full recovery. They halted the QE purchases today, and tomorrow, rate hikes are coming. Bet on it. The economy is better than you think.”
So there you have it.
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