Global Markets Rise as Central Banks Hold Benchmark Rates Steady

The US Federal Reserve, as generally expected, announced today that it has decided not to raise rates at this month’s meeting.  This marks the sixth consecutive hold since the central bank last raised rates 25bp back in December 2015.  The FOMC released a statement noting that “the case for an increase in the federal funds rate has strengthened,” but went on to explain that there still existed room for growth within employment and inflation.  Three Fed voters dissented in favor of an immediate quarter point hike at the meeting, the largest dissention since December 2014.  Fed Chair Janet Yellen once again repeated that rates will be raised at a gradual pace, officially shifting the Fed’s “dot-plot” to signal 1 rate hike for the remainder of 2016 and 2 more in the following year.  In addition, the Fed reduced its longer-run rate forecast to 2.9% from 3.0%.  Markets reacted favorably to the Fed announcement, with the Nasdaq hitting an all-time high and the Dow Jones Industrial Average up more than 150 points on the day.                  

Abroad, there was just as much, if not more focus being given to the monetary actions made by the Bank of Japan, which were announced prior to the opening of U.S. markets today.  With the underlying goal to achieve or even exceed two percent inflation, the BOJ added flexibility to its asset purchasing program, while leaving the benchmark interest rate unchanged at -0.1%.  Going forward, the central bank’s bond buying will continue to target annual levels of 80 trillion Yen (US$795 billion equivalent), but will not be confined to any particular maturity range in an attempt to hold 10-year JBG yields near zero and ultimately, prevent the yield curve from flattening.  In a news conference after the decision, Governor Haruhiko Kuroda reiterated, “As for the amount of government bond purchases, it could increase or decrease, as it relates to the economy, prices and in particular the financial markets.”  Japanese bank stocks jumped 7% following the announcement, strengthened by the BOJ’s shift to target interest rates rather than the monetary base.  Overall, the Nikkei Index closed up 1.91% on the day as investors welcomed the new stimulus policy, while the Yen initially sold off after the BOJ announcement, but rallied 2.5% off the lows during NY market hours to 100.46 Yen/$.

All three major U.S. stock indexes finished up near 1% on the day while Treasury yields and swap rates are 0 to 4 bps lower across the curve.  Building off a surprise decrease in U.S. crude inventory levels reported today, oil prices rose roughly 2.4%.