FOMC/BOJ Meetings Last Week

The FOMC held its April meeting last week, and decided to leave the policy rate unchanged again, in line with the market expectation for no action. There was not a lot of new information in the statement, but it is worth noting the committee’s focus on both inflation indicators and global economic and financial developments. The interest rate futures market reaction to the announcement was minimal. However, over the next couple of trading sessions, the implied odds of a hike in June declined form just over 20% to around 12%. The Fed pointed to ongoing improvement in labor markets and wage gains as positives, offset by slowing growth and the continuing underperformance of inflation.

Meanwhile, the Bank of Japan met last week as well and, despite a slight majority of forecasters expecting some expansion of monetary stimulus, chose not to change any of the current policies in order to further evaluate the impact of negative rates. This dependence on data is similar to that of the Federal Reserve. Japanese stocks fell on the news, and the Yen strengthened. The current stimulus plan involves a monetary base expansion target of 80 trillion Yen, a -0.1% rate on certain bank reserves held at the BoJ and an asset purchase program that involves riskier assets such as stocks. One announced change is an extension of the expected time frame for reaching the 2% inflation target into 2017, the fourth such extension in the last year. Bank lending has reached its highest level since 2002, which is a direct goal of the current stimulus plan. Unfortunately, that has not translated into economic growth or inflation. The economy shrunk in the 4th quarter of 2015 and is expected to grow at a 0.3% annualized rate in the first quarter of this year. March CPI was released last week after the central bank meeting, and, excluding food and energy, it rose a meager 0.7% while the headline number fell 0.1%.

In all, what remains most important is the data, which continues to be relatively soft, indicating that accommodative policies are unlikely to abate any time soon and higher rates are likely remain a distant phenomenon.

Sources: Bloomberg, CRT Capital