On June 15, the Federal Open Market Committee did not surprise market participants; the committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent.

“The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation,” the Fed said.

This meeting turned out to be extremely important; the committee revealing major concerns about anemic global growth, the softening job market, and the June 23^rd BREXIT vote (in which Great Britain will decide whether or not to leave the European Union.

Market participants are coming to realize that the Fed’s timeline of rate renormalization is not achievable, and there may only be one additional rate hike this year. The Fed’s long-term average benchmark interest rate is about 4-percent.

The Fed emerged from their two-day meeting, in my opinion, indicating the world’s anemic global growth requires that they need to be more accommodative moving forward. The Fed entered the year implying just the opposite.  

Near term these events tend to be more bullish than bearish for U.S. 10 year treasuries and supportive of U.S. equities and commodities like rice, cotton, soybean, corn, wheat, and oil.

The committee remains data dependent, saying “In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.”

Price Uncertainty

Given the Fed’s on-again/off-again, dovish/hawkish position, especially since December, adds additional uncertainty surrounding the economic outlook for all markets.

Markets do not like uncertainty, and the world’s global economies are shrouded in uncertainty, which translates into likely elevated levels of price volatility and near term supportive to many commodity prices.

The Chairman of the Federal Reserve indicated four areas of near term uncertainty in a June 6^th speech at The World Affairs Council of Philadelphia, Pennsylvania: First, domestic demand; Second, global risks; Third, U.S. productivity growth; and Fourth, how quickly U.S. inflation moves back to 2-percent. 

First, U.S. Domestic Demand: The U. S. economy with all its challenges is the best preforming economy in a world of slow problematic growth. The U.S. economy has performed well due to continued domestic sources of demand, especially consumer spending.

Can the U.S. domestic economy continue to perform in a world of anemic global growth? And what is the impact on the dollar, U.S. Treasuries, U.S. equities, and U.S. rice, cotton, grain and oil markets?  

Second, Global Risks: The Fed is slowly acknowledging that global risks will be with us for years into the future. Global financial stresses early in 2016 were greater than I expected in European Union, China, Japan, etc., and the global fiscal and monetary policy actions exceeded my expectations in reflating the global economy. I expected this type of intervention, but not so early in 2016. These activities were supportive of many commodity prices as the global economy reflated in the first quarter.  

The Fed Chairman said “More generally, in the current environment of sluggish growth, low inflation, and already very accommodative monetary policy in many advanced economies, investor perceptions of/appetite for risk can change abruptly. One development that could shift investor sentiment is the upcoming referendum in the United Kingdom. A U.K. vote to exit the European Union could have significant economic repercussions.”

Third, U.S. productivity growth, or the increase in the amount of output produced per hour worked, is uncertain and raising concerns. One can argue that the job market has shown improvement, but GDP increases are problematic. Labor productivity growth in recent years is averaging less than 1/2 percent per year since 2010. Most entrepreneurs could easily assist the government in solving this problem by removing rules and regulations, providing tax incentives, supporting infrastructure, fair trade agreements and fiscal and monetary policy that foster productivity gains.

Fourth, the Fed has real concerns to reach and maintain their 2-percent inflation objective in a stagnant global economic setting. To achieve these objectives it would be helpful for oil prices not to resume their earlier declines and the dollar not to rise significantly.

“If inflation expectations really are moving lower, that could call into question whether inflation will move back to 2 percent as quickly as I expect,” the Fed Chairman said.

Conclusion:

This FOMC meeting turned out to be extremely important with the committee revealing the following:

The June 23 BREXIT vote weighs heavy on their mind, because if United Kingdom voters vote to exit the European Union the regional and global economic repercussions will be significant impacting currency, bond, equity and commodity markets.

The Federal Open Market Committee did not surprise market participants by deciding to maintain the target range for the federal funds rate at 1/4 to 1/2 percent.

Many market participants now realize that the Fed’s timeline of rate renormalization is not achievable, implying a more dovish than hawkish Fed in 2016 or a more accommodative.  

The new normal for the global economy will be slow growth.  

Near Term Market Impact:

The committee remains data dependent. Global injections of varying types of stimulus will define the Feds action which guarantees market volatility and uncertainty. I give you March 2016 – to present.

Near-term this tends to a bullish U.S. 10-year treasuries, supportive for U.S. equities and commodities like rice, cotton, soybean, corn, wheat, and oil markets. Presently these markets are very sensitive to intervention type activities like the coming BREXIT vote.

The next macro article will be on the June 23 BREXIT vote and it’s near term impact on our markets. 

The St. Louis Fed's New Characterization of the Outlook for the U.S. Economy, June 17, 2016

President James Bullard and his co-authors explain the St. Louis Fed’s new characterization of the U.S. macroeconomic and monetary policy outlook, which more explicitly takes into account uncertainty about possible medium- and longer-run outcomes. The new approach is based on the idea that the economy may visit a set of possible regimes instead of converging to a single, long-run steady state. As such, the new approach does not include projections for long-run values for U.S. macroeconomic variables or for the policy rate.

Robert Coats is a professor in the Department of Agricultural Economics and Agribusiness, Division of Agriculture, University of Arkansas System. E-mail: [email protected].