Next year, the most dovish FOMC member, Minneapolis Fed Bank President Narayana Kocherlakota, will be retiring and his bank rotating off. Of the newcomers, three are judged by Bloomberg to be hawks and one a dove, but that still will leave the committee in dovish or neutral hands. Even though the dollar peaked in the spring, the brunt of that change is being felt now and is expected to continue through the first half of next year. That’s tiny, but the message will be monumental: It will show that the Fed believes the US economy has healed from the worst recession since the Great Depression and the move will stoke expectations for more increases ahead.
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Going slowly will give the Fed time to figure out how the economy is reacting to higher borrowing costs, enabling policymakers to get a better handle on where the neutral rate lies. Though it is not expected to hike rates at this week’s meeting, investors will be watching for clues on the Fed’s take on the global economy and whether the central bank would raise rates at its December meeting.
Here are the key comments Fed speakers have made since they last met, alongside crucial economic developments. If investors are not expecting a rate hike, a surprise could result in a few pretty ugly volatility.
The prospect of more European Central Bank stimulus might hurt the US economy by pushing up the value of the dollar.
“There’s a high degree of respect for the people at the Fed, particularly people like [chairman] Janet Yellen and [vice-chairman] Stan Fischer”.
Brookfield, Wis. – The Federal Reserve, and the monetary policy it pursues, is always a matter of interest to investors. Only the government spending has shown a steady rise in the past year. Tracking the readings, most Asian currencies firmed up against the greenback. The Australian dollar moved up despite the lack of economic data and lower copper prices.
Certainly, that’s how markets see it. According to CME FedWatch, futures prices suggest the central bank is only 39% likely to boost rates by December’s meeting, and that there’s little chance it will this week. “That assessment was premised on the assumption of continued solid economic growth and further improvement in the labor market”. “That’s based on a forecast”.
The unexpected rate cut in China also added to the positive tone for US stocks, which ended the week with gains that left the S&P 500 in positive territory for the year and above its 200-day moving average for the first time since August 19… “We are getting much closer to the finish line from the point of view of whatever you would consider full employment”, he told reporters.
At that moment, turmoil in global stock markets had “already done the work of tightening”, he observed. “These risks matter more than usual because the ability to provide additional accommodation if downside risks materialize is, in practice, more constrained than the ability to remove accommodation more rapidly if upside risks materialize”.
The paper also says a rate rise would have a positive impact on Americans’ incomes, because 90 per cent of mortgages are fixed, and there is more money in bank deposits than there are in variable home loans.
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The interesting part of Tarullo’s-and especially Brainard’s-dissent is that they flesh out the case for waiting longer, and add nuance.
