Fed Kept Rates Unchanged, Bank of Japan Voted Against More Stimulus

April 28, 2016

By HV

Holding meetings where decisions on interest rates and economic easing measures will be made, The Federal Reserves and the Bank of Japan are the focal points of the financial discussions

The Fed

After a two-day meeting of its policy-making committee, the Federal Reserves kept the interest rates on hold after deeming the U.S. economy not ready for for higher rates, due to a slowdown in economic activity and a moderate growth in household spending.

Still, the Fed leaves open the possibility of a rate hike in June, saying it’s in no hurry to increase the rates. There are a few bright spots in the economy. Households’ income has seen a solid increase, and the consumer sentiment remains high. Plus, the labor market continues to get stronger.

fed

The Fed’s exercise of caution could have stemmed from the GDP forecast from the Atlanta Fed earlier this month.

The forecast for real GDP growth in Q1 plummeted from 2.5% to 0.1% in eight weeks, from mid-February to mid-April. It raised a red flag about a potential recession, which spooked the Fed, forcing it to call for an emergency meeting.

With inflation and the risk of a recession on the Fed’s radar, it makes sense to keep the rates low as it leaves more room for responding to stronger inflation, which has been elusive to the Fed. That said, the Fed is confident the inflation would rise to the targeted 2% over the medium term.

Last December, the Fed raised the interest rates for the first time since the Great Recession, and it plans to hike the rates gradually in 2016.

Following the Fed’s statement, oil prices jumped 3% to above $45 while the dollar weakened.

Crude Oil

wti

Crude production hit October 2014 low of 8.94 million barrels a day last week, but oil extended gains after the Fed said it would pay close attention to global economic and financial developments. It is an important statement because the Fed no longer calls them “risks,” signaling positivity about the economic state.

Crude oil is in a bull market, with supplies rising to 2 million barrels to 504.6 million for the week of April 18-24. Only in 1929 did the market witness that number of supplies, according to the U.S. Energy Information Administration.

Demand is expected to increase in the second half of the year. The average price of gasoline is 15% lower from a year earlier, and the driving season is approaching. This could give crude producers in the U.S. a nice break amid the issues of oversupply and plummeting oil prices.

Now that the Fed has released its statement on the interest rates, all eyes are on the Bank of Japan, as it will have its own meeting on April 28 on the issue of implementing more stimulus into the economy.

Bank of Japan

BoJ

Facing a sluggish economy and uncertainty about negative interest rates, Japan’s central bank decided to keep the rates steady at -0.1% and voted against more stimulus. The decision is to give the bank more time to asses the impact of negative interest rates.

The bank also maintains the other two easing tools, which are the 80 trillion yen base money target and the program to buy riskier assets. Nikkei futures fell 4.4%, and the dollar/yen fell 2% in response.

The real GDP growth forecast for fiscal year 2017 got trimmed to 1.2% from 1.5%, while the 2018 forecast got downgraded to 0.1% from 0.3%.

Japan’s economy poses some conflicting signs. Japan’s core CPI fell 0.3% from a year earlier, the fastest pace in three years. House spending also fell 5.3% year-over-year at the fastest pace in a year. On the other end of the spectrum, in March, industrial output rose 3.6%  from the previous month, and the labor demand increased to 1.3, the highest in two decades.

Holding the rates steady is a smart move, as cutting the rates further could trigger anger from financial institutions still struggling to adjust to January’s negative rates decision.

Central Banks with Different Approaches

We see a very clear difference in the monetary policies of the Federal Reserves and the Bank of Japan even though they have a lot in common.

The GDP forecasts in both countries have been sliding, signifying a slowdown in the economy of each country. Household spending has also slowed, albeit what Japan is experiencing is much worse than the U.S.

Yet, we see them go off in two different paths in implementing stimulus into the economy against the backdrop of the global economy suffering so much turbulence. The Fed opted for increasing the interest rates above 0 for the first time in 7 years, while the Bank of Japan startled the market by introducing negative interest rates for the very first time.

It is relatively early to tell which approach is the better of the two, but for now, the two banks are exercising prudence in handling monetary policy as both are treading uncharted waters. And it may just pay off in the long run.

If you want to harness the wisdom and insights from the crowd to monitor your portfolio free of charge, please sign up for myMarkets.