Global stocks rise after Fed holds off interest rate hike

Permanent FOMC members based in Washington and NY voted in lockstep behind Chair Janet Yellen – as usual – to keep interest rates low.

The bank is aiming to increase the sustainability of its monetary easing policy by shifting its emphasis from quantity to interest rates while taking a more flexible approach to the way it purchases Japanese government bonds.

But that seemed at odds with both the overhaul of policy focus and the fact that the core consumer prices fell an annual 0.5 percent in July, the weakest reading since before the BOJ launched its stimulus program in 2013.

The central bank on Wednesday introduced a new policy framework centered on yield curve control, or adjustments to short- and long-term interest rates and their spread, as a way to stimulate prices and economic activity.

The Fed’s decision not to hike interest rates has been met with some cheer by the Indian markets with the benchmark Sensex rising 1% in early morning trade on Thursday. We think the BOJ aims to control the yield curve by controlling these two interest rate targets, together with the introduction of new market operations as a backstop when interest rates rise.[1] The BOJ chose to maintain the pace of JGB purchases at around ¥80 tn a year for the time being, but it has effectively abandoned its previous monetary base target. The Bank of Japan didn’t change its policies much.

And because banks make their money by borrowing at short-term rates, and lending long term, this has squeezed their profits. The yield on the 10-year Treasury note rose to 1.71 percent from 1.69 percent. Growth rates are mostly on the low side of reasonable, official rates are above zero and inflation is running below targets.

It also loosened its annual asset-buying target – a key feature of its more than three-year-old policy – saying it could instead fluctuate to give it flexibility while focusing on keeping bond yields steady. Energy companies jumped with the price of oil.

BUYBACKS: Target said it plans to buy back $5 billion in company stock, and its shares gained 85 cents, or 1.2 percent, to $69.52.

All the same, they concede the policy announcement represents a significant victory for Kuroda because he has been able to once again bluff financial markets into believing his defiant claim the BoJ’s monetary firepower knows no limits. The yen stepped back to 100.78 to the dollar from four-week high of 100.10 touched on Thursday after Japan’s top currency diplomat warned Tokyo will take action if needed.

Asian shares rallied on Thursday, taking their cue from Wall Street, after the Federal Reserve left US interest rates unchanged and slowed the pace of future hikes, knocking the dollar and lifting commodity prices.

The two-day FOMC meeting nevertheless showed the strongest division over policy since December 2014, with three of the 10 voting members arguing for a rate rise now.

However the world’s major central banks are in a bind. The Bank of Japan (BoJ) introduced negative rates for the first time but the reaction they got, surprised them. Stability in the financial markets has become an additional unwritten mandate of the central bankers. A Fed statement after its latest policy meeting said the USA job market has strengthened and economic activity has picked up but business investment is soft and inflation too low. It pushes people into risky investments as they search for earnings, and it creates pressure on pension funds and the like. Saravelos says USD/JPY will fall to 94.00 by the end of 2016.

You have left for this month. And we may well have gone past the point of what it can usefully do.