We begin with the United States where, as expected, the Federal Reserve has left rates unchanged. The divided FOMC, however, hinted that a rate hike is coming soon.
The futures-implied probability of a rate hike by year-end is now above 60%.
One of the key results from the FOMC meeting – something that the media doesn’t seem to cover much – is another downgrade by the Fed of the US long-term growth. The central bank now believes (on average) that the United States economy won’t grow faster than 2% in years to come. The FOMC has been steadily downgrading its expectation for long-term growth over the past five years – from 2.65% to 1.85%.
As a result of the above, in just over a year, the Fed has downgraded the US long-run fed funds rate from 3.8% to 2.9%.
The FOMC has also been consistently downgrading the fed funds rate projections for the next couple of years.
In other US developments, markets remain convinced that inflation will stay benign in years to come.
Source: Macquarie, @joshdigga
According to the Mortgage Bankers Association, growth in US mortgage activity for home purchases, while still positive, has been declining.
Now let’s turn to the funding markets, where US dollar LIBOR continues to grind higher.