European and U.S. stocks are moving higher on Tuesday as investors shift their attention to key monetary policy decisions from the Bank of Japan and the U.S. Federal Reserve.
The Bank of Japan will make a policy decision on Wednesday which comes after the central bank has already undertaken in negative interest rates and bond buying to help reverse low inflation levels and slower economic growth.
Japan’s strong currency is tightly held as a safe asset with global currency traders even though a strong yen presents some fundamental challenges for Japanese exports in the global market.
The U.S. Federal Reserve begins their 2 day September FOMC policy meeting today with an interest rate decision due Wednesday afternoon followed by a press conference from Fed Chair Janet Yellen and updated economic projections.
The Fed has been a key driver in terms of helping the U.S. economy to recover since 2008 when former Fed Chair Ben Bernanke took aggressive monetary easing measures to confront a global recession.
In December 2008, Bernanke lowered the federal funds interest rate to near zero, 0-0.25 percent, a historically low level, and began the Fed’s first of three quantitative easing programs (QE) to help stimulate growth in the world’s largest economy.
After ending three rounds of quantitative easing (QE) in late 2014, and voting last December to raise interest rates for the first time in nearly 10 years by raising the federal funds prime rate by a mere 0.25 percent from 0-0.25 percent to 0.25-0.50 percent and projecting 4 more rate increases in 2016, the Fed gave the market a clear message that a return to normalization was underway and would likely continue in 2016.
But the Fed hasn’t raised interest rates at all in 2016 even though Fed Chair Yellen and Fed Vice President Stanley Fischer hinted last month that 2 interest rate hikes could still occur in 2016.
Weaker first quarter U.S. growth and business investment, tumbling crude oil prices, global headwinds in June ahead of Britain’s June 23rd Brexit vote, and currency concerns from China related to earlier decisions by China’s central bank to devalue their currency in late 2015 and early 2016 were some of the previously cited reasons central bankers in the U.S. decided against hiking rates this spring.
Over the summer, crude oil prices rebounded from twelve year lows and the shock from Britain’s Brexit vote dissipated which helped drive the U.S stock market to record highs.
Meanwhile, the U.S. labor market appears to be on solid footing and has shown resiliency with 232,000 jobs averaged over the past three months and a U.S. unemployment level at 4.9 percent in August, far below 10 percent in October 2009 during the recession.
Although there is a chance that central bankers at the Fed could decide to raise interest rates at their September policy meeting, the bond and futures market isn’t pricing in a rate hike.
According to the CME Group’s Fed Watcher, there is just a 15 percent probability that the federal funds interest rate will be raised by 0.25 basis point to a target rate of 0.50-0.75 percent from 0.25- 0.50 percent.
Trump Weighs In
Republican presidential candidate Donald Trump has been critical of the Federal Reserve, accusing the central bank of playing politics ahead of the presidential election in November.
Trump said that he would remove Fed Chair Janet Yellen and has publically voiced support for raising interest rates.
Raising interest rates in September could shock the market and result in higher lending rates for a market that has grown accustom to dovish monetary policies from the Fed.