As had been widely expected by both bankers and investors, the US Federal Reserve decided not to raise its benchmark lending rate for the 18th consecutive time at its Tuesday meeting (August 8). The Fed opted to hold fast on the overnight lending rate at 5.25%.
However as encouraging as the news was that the Fed had effectively put an end to two years of rate increases, it was were tempered by language that was less than convincing in the FedÆs subsequent statement.
ôTaken at face value it is a positive sign, an end to almost two years of consistent rate hikes should bring a level of stability back to the market, and could have helped to bring a bullish sentiment back to the debt marketö says an Asian-based DCM banker. ôUnfortunately the tone of uncertainty with regard to inflation in the US economy from the Federal Open Market CommitteeÆs (FOMC) statement definitely tempered any positive reaction.ö
Indeed, most of the region's debt bankers viewed the move on the whole as a positive, but doubted whether it would have any real impact on a market that has languished in recent months.
ôThere werenÆt any real surprises here, the data that was coming out of the US all but pointed to a halt in rate increases,ö says one debt market specialist. ôAfter the previous Fed meeting, the market had probably priced in a 20% chance of a halt in rates and when the non-farm payrolls were announced lower than expected that number jumped to 40%. Again, when GDP was announced lower than expected the market priced in a 60% to 80% probability. So when the halt was announced, the market was already trading at levels that were well in line with a cessation of Fed tightening. Unfortunately for a debt guy, it feels like an opportunity lost.ö
The announcement had little effect on bond prices in Asia, as the 10-year US treasury rate remained steady at 4.92%.
The market's hope that a pause was coming were heightened by Federal Reserve Chairman, Ben BernankeÆs testimony to the Senate Banking committee last month when he voiced his concerns over a slowdown in the US economy. He cited the weaker than expected GDP and pay-roll number as well as the increase in oil prices and a softer housing market.
However, what has been the cause of much concern for debt bankers following the announcement of the halt was the fact that the FedÆs subsequent statement was less than convincing in its position on future rate movements.
Most bankers feel that the despite the decision, the language of the statement is too ambiguous and leaves and lot of room for the Fed to manoeuvre heading into its next meeting on September 20. This leaves AsiaÆs bond markets still lacking in the sort of guidance that will help to reopen a relatively stalled pipeline.
ôOnce again the FedÆs statement referred to inflation risks, which was almost verbatim to what they said following last monthÆs rate hike,ö says one observer. ôHowever, you would expect that there is now a higher probability that the next move will be down rather than up, but who can tell? Everyone will again have to wait and see what the Fed does from here.ö
It seems that irrespective of whichever direction the Fed opted to follow, it would create more questions than answers.
The market had become so familiar to the pattern of former Fed Chairman Alan Greenspan, that it left little room for market volatility. However with a new man at the helm, the market has had to adapt an extra level of flexibility in terms of interpretation.
ôWe canÆt just look to the Fed for guidance as to where the US is going anymore - we need to look at it more in a more macro level as well,ö says one banker.
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