Stock markets exploded today as the Fed signaled its willingness to take the training wheels off the economy. As was anticipated, today’s FOMC statement dropped the promise to keep rates low for a “considerable time” and hinted that it might be willing to raise rates in the second to third quarters of next year.
During her press conference, Fed chair Janet Yellen said that the Federal Funds rate would be the main policy tool the FOMC would use to steer the economy, as opposed to selling off some of the more than $4 Trillion worth of assets on its balance sheet. Selling assets would have amounted to the opposite of QE and might put undue strain on the market. Rather, the Fed would trim its balance sheet in the future by letting its assets mature and not reinvesting the proceeds. This would bring down assets naturally without creating a fire sale scenario. Nevertheless, the US Treasury curve sold off as a result:
Stock markets were buoyed early on today by a stabilizing price of oil, which has ceased falling for the time being. OPEC has said it will not cut production, and today two OPEC ministers said that this was partially directed as an attack on US shale oil producers. The falling price of oil has hit Russia especially hard, and falling oil prices created a feedback loop with the ruble which threatened to infect the rest of the financial markets. However, yesterday Russia intervened in markets and raised its interest rate to 17% in an effort to stabilize the Ruble, and it seems like oil volatility has fallen as a result. Not that the price is rising: Oil prices gave back some gains into the close today after the FOMC statement:
The price of the Yen vs the Dollar declined today as the market priced in rising US interest rates next year and the carry trade resumed after some turbulence around the FOMC announcement:
We have a busy macroeconomic schedule tonight and tomorrow with IFO at 4am, Philly Fed at 10am, and the BOJ interest rate decision tomorrow evening. Many are watching to see if the BOJ continues easing; if so it would likely push the carry trade to new heights.