The U.S. dollar is tumbling against the Japanese yen after Japan’s Central Bank held back from increasing it monetary stimulus program on Thursday which comes just one day after committee members at the U.S. Federal Reserve voted to not raise interest rates at their June FOMC meeting, a move that weakened the dollar against a basket of currencies.
Asian markets have traded lower across the board on Thursday and U.S. stock futures are set to open lower.
On Wednesday Fed Chair Janet Yellen spoke about “mixed market indicators” in the economy, suggesting that the Fed’s cautious approach to adjusting monetary policy remains appropriate.
Yellen cited relatively weak economic growth in the last quarter of 2015 and early 2016 and singled out a strong U.S. dollar along with subdued foreign export demand.
During the 4th quarter of 2015, U.S. GDP rose 1.4 percent in the final reading and 0.8 percent in the 1Q of 2016 when crude oil prices were cratering and markets were spooked by a decision by China’s central bank to devalue the yuan in early 2016.
In mid-December the U.S. Federal Reserve raised interest rates with the federal funds for the first time since June 2006, increasing it by a mere .25 percent basis point, moving it from 0 to .25 percent to .25 percent to .50 percent.
At the Fed’s policy meeting in December, committee members projected 4 rate hikes in 2016 but they have since walked down their rate hike projections for 2016.
Yesterday Committee members project just 2 rate hikes in 2016 with a median reading of 0.9 percent and a central tendency of 0.6-0.9 percent with the federal funds in 2016, down from their last March projection of 0.9 to 1.4 percent.
In 2017 there are three more rate interest hikes projected with a median reading of 1.6 percent and a central tendency of 1.4- 1.9 percent, down from 1.6- 2.4 percent during their March projection.
U.S GDP in 2016 is projected to increase 2.0 percent in 2016, down from 2.2 percent during their last March projection.
U.S. GDP is projected to remain at 2.0 percent through 2018.
Core PCE inflation, the Fed’s preferred inflation gauge, is now projected to rise 1.7 percent in 2016, up from 1.6 percent in their March projection.
In 2017 Core PCE is expected to climb even higher to 1.9 percent, just under the Fed’s 2 percent inflation target which is not expected to be reached until 2018.
Yellen said in her speech that the energy sector has been hard hit by the sharp decline in crude oil prices since mid-2014 and acknowledged that the slowdown in the other parts of the economy was unexpected.
Yellen mentioned that business investment outside of energy remained weak through the spring but said growth in household spending during the second quarter of 2016 has signaled a rebound, boosting hopes for of an expansion of economic activity at a moderate pace over the next few years.
Weaker Labor Growth
One primary reason that the Federal Reserve postponed raising rates at their June FOMC policy meeting was due to weaker job gains in the U.S. market over the past 2 months.
During the first quarter of 2016 job gains averaged nearly 200,000 per month, slightly lower than last year’s pace.
However, in April and May job growth plunged to an average of only 80,000 per month.
Yellen explained that although the U.S. unemployment rate dropped to 4.7 percent in May, the decline occurred because fewer people reported that they were actively pursuing employment.
Still Yellen pointed to some bright spots in the U.S. labor market such as average hourly earnings increasing 2 1/2 percent in the past 12 months, a positive sign that wage growth may be on the right track.
She also emphasized that it’s important to not overreact to one or two monthly job reports and struck an optimistic note in her speech by suggesting the labor market will continue to improve.
“The Committee continues to expect that the labor market will strengthen further over the next few years” Yellen said.
Yellen admitted that the Fed’s monetary policy is not on a preset course and said that gradual increases in the federal funds rate over time are likely to be consistent with achieving and maintaining the Fed’s objectives.
* Correction- during my post on Sunday involving the Orlando shooting, the type of gun used was described as an AR-15 but on Monday officials clarified that the rifle the shooter Omar Mateen used in the shooting was a Sig Sauer MCX.