Federal Reserve Leaves Interest Rates Unchanged

Earlier this week, the Federal Reserve acknowledged risks abroad and growth in the U.S. economy as determining factors for its decision to skip a previously suggested rate hike. As a result, the central bank will keep its benchmark interest rate between 0.25% and 0.50% moving forward. Only one member of the committee, Esther L. George, voted to raise the rate at the Fed's two-day policy meeting.

Interest rate hikes have been a common theme since the Fed began the process of raising rates back in December. Despite being the first increase in a decade, market volatility and headwinds in Europe and China have officials reluctant to green light further rate increases. In a statement, the central bank noted that "global economic and financial development continue to pose risks," alluding to uncertainty regarding major global economies.

Although the committee voted against a rate hike, the Fed continued to emphasize that "economic activity has been expanding at a moderate pace despite the global economic and financial developments of recent months." Some positive signs highlighted by the Fed included gains in the labor market and housing sector. Since the committee's last meeting, reports of better-than-expected job growth and low unemployment rates have reassured markets.

U.S. inflation continues to run well below the Fed's target of 2%, as it has for the past four years. However, recent reports have noted signs of improvement. The personal consumption expenditures index, which is the Fed's preferred measure of price inflation, rose 1.3% year-over-year in January, while core inflation was up 1.7%. Even with these gains, the Fed foresees inflation remaining "low in the near term."

Projections released from the Fed's most recent meeting include a drop in expectations for GDP growth, as compared to numbers from December's meeting. Forecasts for core inflation remained relatively flat, while the median expectation for unemployment dropped slightly to 4.5% by 2018. With these projections in mind, Fed officials are now forecasting two quarter-point rate hikes in 2016, down from the plan for four increases announced last December.

Market expectations for a rate hike in June are currently split, but the majority of traders are predicting at least one rate hike will be implemented by the end of the year.

Oil Producers Set to Meet in April to Discuss Output Deal

The likelihood of the first global oil supply deal in well over a decade is increasing as oil producers from around the globe, including Gulf OPEC members, have voiced support for holding talks next month on a deal to freeze output, even if Iran declines to participate. Willingness to meet with or without Iran marks a major shift in the stance of leading Gulf oil exporters, including Saudi Arabia, which previously indicated that all major producers should participate in a potential agreement.

Following a February agreement between Saudi Arabia, Qatar, Venezuela and Russia to stabilize output in the face of slumping demand, both OPEC and non-OPEC producers are expected to attend a meeting in Doha on April 17. According to officials, 15 OPEC and non-OPEC producers have already voiced support of this initiative, accounting for roughly three-quarters of global oil output.

Oil prices rose on Wednesday, as the announcement was coupled with ongoing indications of a decline in U.S. crude production. Brent crude LCOc1 topped $40 a barrel, up significantly from a 12-year low of $27.10 reached in January.

While Iran's reluctance to participate in a potential meeting seems unlikely to interfere with it occurring, analysts see the country's absence as a potential roadblock to an agreement. This issue was among the factors that led to the cancellation of a proposed meeting on March 20, according to sources familiar with the matter. Iran is currently attempting to recover global market share following the recent lifting of sanctions from the West.

Despite analyst concerns, OPEC sources insist that an exemption for Iran isn't necessarily a deal breaker. Non-OPEC Russia followed suit, with energy minister Alexander Novak confirming that a deal could be signed in April that excludes Iran. While Iran's stance is a setback, it's unlikely to alter the positive atmosphere that's already underway, according to one OPEC source from a major producer.

A potential freeze deal could greatly accelerate the stabilization of the global oil market. Without a deal, rebalancing of the oil market wouldn't happen until next year, according to Novak, but the deal could make rebalancing possible by as early as late 2016. OPEC delegates have stated that further action, including a supply cut, could follow by the end of the year, depending on Russia's commitment to the agreement and Iran's contribution to the market.

Iraq, the biggest source of OPEC supply growth last year, will also play a key role in the advancement of a freeze initiative. On Monday, Baghdad stated that the proposed agreement was acceptable.

U.S. Stocks Rise following Fed Decision

Following the Federal Reserve's announcement that it intends to keep interest rates lower for longer, U.S. stocks spiked to their highest levels of the year while the dollar tumbled. Commodity shares led the way in the S&P 500 index, which decreased its loss for the year to less than one percent. Equities gains were reinforced by financial shares, as low interest rates impact lenders' prospects for profit. Meanwhile, crude surged by 5.8 percent.

The S&P 500 rose 0.6%, just a day after posting its first back-to-back declines of the month. The index has recovered nicely from its February low, climbing 11 percent to within five percent of its all-time high in May. The gauge remains down 2.7 percent following the Fed's December decision to raise rates for the first time in nearly a decade. Hank Herrmann, chief executive officer of Waddell & Reed Financial Inc. called Wednesday's move "a mild reaction," stating that "There wasn't enough in what they did in changing people's conviction in one way or another."

A new report indicated consumer prices, excluding food and fuel, also climbed in February, marking the second time in as many months that growth has exceeded forecasts. Separate data showed new-home construction was on the rise during the same period, despite lagging growth in China and Europe in the face of unprecedented monetary stimulus.

The Fed's announcement also impacted the dollar, which slid versus the majority of peers. The dip continued the trend for 2016, with the dollar down almost two percent this year after near double-digit gains in both of the previous years. "The dollar is weaker on comments by the Federal Open Market Committee that the global economic outlook will continue to be a headwind," Minh Trang, a senior foreign-exchange trader at Silicon Valley Bank told Bloomberg Business.

Gold Rises after Fed Policy Statement

Gold rose on Wednesday with the news that the Federal Reserve has substantially scaled back its expectations for additional interest rate hikes. Spot gold was up 2.24 percent at $1,259.55 an ounce, while U.S. gold futures for April delivery rose 2.4 percent to $1,260.30 an ounce.

As usual, gold proved to be highly sensitive to the possibility of raising rates, which can lift the opportunity cost of non-yielding bullion by boosting the dollar. "What we are focused on right now is the feared trajectory of the dollar, which looks very bullish. This is not such good news for gold," Ava Trade analyst Naeem Aslam told CNBC.

While Fed policymakers have indicated that short-term interest rates will remain unchanged, they've also indicated that a rate hike is to be expected as long as the job market and inflation continue to improve. Additional rate hikes will likely lift the dollar, which could have a negative impact on gold prices over the short term.

The world's largest gold-backed exchange-traded fund, SPDR Gold Shares, echoed these concerns earlier this week when it reported its biggest one-day outflow since early December ahead of the Fed's decision. On Tuesday, the fund said its holdings rose 2.1 tonnes.

U.S. Factory Production Up in February

Rising demand for business equipment drove an increase in factory production in February for a second straight month, indicating that U.S. manufacturing may be beginning to stabilize. The Federal Reserve reported a 0.2 percent increase in output after January's 0.5 percent gain, marking the first back-to-back advance since March-April 2015. Analysts are encouraged by this performance, with a senior economist at 4cast Inc. telling Bloomberg "This strengthens the tentative perception that manufacturing is making a firmer step in the first quarter."

While energy prices climb, American factories seem to be catching a break despite an ongoing battle with dollar appreciation. Tepid global growth, which continues to hamper the U.S. economy, is also limiting domestic manufacturing's ongoing reacceleration. Manufacturing output, which accounts for roughly 12 percent of the economy, was projected to rise 0.1 percent in February, according to Bloomberg.

Business equipment production climbed 0.6 percent in February, matching the results from the previous month. Output of consumer durable goods increased 0.3 percent after a 1.5 percent gain in January. In particular, U.S. factories increased production of primary metals, computers and machinery, as warmer-than-usual temperatures decreased utility output by four percent.

Factory production of motor vehicles and parts fell 0.1 percent following a 3.4 percent rise. Excluding this segment, manufacturing output was up 0.2 percent last month after recording a 0.3 percent spike in January. Although oil prices have started to recover from the recent plunge, capital spending in the oil and gas industry will stay weak as inventories remain high. Investment outside of oil and gas, however, could be on the rise if trends from the Fed's data persist.