Gone are the days when the market expected a rate hike from the Federal Reserve. Most of the market players believed that the central bank might push the projected increase of interest rate in 2018 due to the imminent impact of the British vote to leave the European Union.
Months before the conclusion of the referendum, the market was expecting a rate hike this June. As the U.K vote went closer, the probability of a June hike was erased and it was moved to July instead. After the Bristish vote, it came not a surprise at all that the Fed policy makers might implement the said rate hike in 2017 or 2018. The main reason? Global economic volatility alongside with financial turbulence globally.
The market volatility brought by Brexit was evident right after the announcement. The stocks and commodities plummeted and the currency was shaken except for the greenback and the government bonds.
And as the inflation was perceived to stay low, the Fed would probably have the typical reason not to increase rates. In case the downbeat financial conditions would persist, the policy makers might decide to cut rates in their next meetings.
A fixed-income strategist said that the market is pricing in a non-trivial probability of a Fed rate cut over the next couple of months. “The Fed is really boxed in now, so the market doesn't even begin to price in any real chance of hikes until mid-2017”.
Economist Jim O'Sullivan shared that the idea that they (Fed) are more likely to cut than tighten in the next month or two makes sense given the backdrop, but as you go out, it starts shifting back the other way. He added "Obviously there is uncertainty about how much fallout there is from Brexit -- are we out of the woods on that yet, or do the markets continue to tumble?"
Meanwhile, far from the expected outcome, the U.S. economy escaped from the massive downfall after the Brexit. Although the growth remained low, the slide was not huge partly due to the increase of the gross domestic product by 1.1 percent at an annual rate. In addition, the retail sales and home sales rallied in the last consecutive months, despite the struggle from the business sector and employment growth.
Is the regained of momentum enough? Probably, but who can tell anyway. The exit of Britain from the European Union will keep on hunting the greater market as long as nothing is settled yet. Surely, there will be a series of negotiations and arguments on the process involved. The uncertainties between the two parties will test not only the decision of the investors, but the central bank as well.
In general, the market was still shocked and was looking for the right ways to deal with the plunges here and there. Market players were evaluating the different outlook regarding the recent big drops and the after shock. And for the part of the central bank, it must find a way to convince the market that it is prepared enough to deal with the forecasted downturns and make it a priority to make the U.S. economy as stable as possible.