The Fed decided to keep rates unchanged despite a slowdown in growth, explaining the slowdown as „transitory“. The Federal Reserve stuck to its outlook for gradual monetary tightening this year, and showed no concerns over recent economic weakness. Following a two-day meeting in Washington, Fed officials said in their statement that the slower growth in the first quarter wouldn’t change their decision to stick to two more rate hikes later this year.
The statement showed that „the labor market has continued to strengthen even as growth in economic activity slowed down.“ Job gains were solid and the unemployment rate declined, according to the statement. Year over year inflation rate has been close to the Committee’s 2% objective. “On the whole, the statement was slightly more hawkish than we expected. On balance, we still think that the Fed will hike again in June,” agreed Paul Ashworth, chief U.S. economist at Capital Economics.
The Fed officials also said that „consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.“
Following the hawkish U.S. Fed statement, Asian markets were mostly lower on Thursday.
Australia’s S&P/ASX 200 closed down 0.27 percent, or 15.942 points, at 5876.40, Hong Kong’s Hang Seng Index ended down 0.05 percent, or 12.25 points, at 24,683.88. The Shanghai Composite fell 0.26 percent, or 8.056 points, to 3127.29.
In South Korea, the Kospi ended up 0.93 percent, or 20.59 points, at a record close of 2240.26 after being closed on Wednesday.
Singapore’s Straits Times Index fell 0.21 percent by Thursday afternoon. Taiwan’s Taiex ended up 0.12 percent, or 12.31 points, at 9967.64.
U.S. hitting a full-employment level?
Indeed, the newest NFP data by the US Bureau of Labor Statistics showed that the world’s largest economy added 211K new jobs vs. 197K expected, which is a significant gain compared with the previous month’s figure of 79K. The unemployment rate fell to 4.5% from last month’s 4.6%, while the expected rate was 4.5%. The explicit tone of the Fed’s statement has already given a hint that the reported NFP figures could be better than expected.
Average hourly earnings met the expectations of a 0.3% rise, compared to previous 0.1%.
We could discuss if the US economy is near a full employment level – with unemployment rates falling last month, average earnings rising (as less workforce meets an increasing demand), and inflation rate rising towards the Fed’s target level of 2%.
Thanks to the seminal work of economist A.W.Phillips, we know that the unemployment rate has a negative correlation with the inflation rate. Generally speaking, people tend to earn more with a falling unemployment rate as workforce demand exceed supply, creating inflationary pressure. The newest NFP data shows exactly that.
The Dollar Reaction
Following the NFP release the EUR/USD made a sharp upmove of almost 40 pips, although good employment numbers. Why? It’s hard to tell. The market probably already anticipated good numbers from the Fed statement released on Tuesday, and the year over year average hourly earnings increase fell short of expectations. Markets are also focused on the coming French election this Sunday, with the pro-European independent Macron extending his chances to win against Le Pen, placing the EUR/USD on a steady uptrend.
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