Attacks by militants across Paris on Friday could see increased buying of US Treasuries in the coming week and analysts do not see an impact on the Fed’s monetary policy at this point.
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Fed officials are posturing as though the first rate hike will occur in December. One key central banker said the risk of waiting too long was now roughly in balance with the risk of moving too soon to normalize rates after seven years near zero. In addition to bottoming out benchmark interest rates in an effort to discount everything from vehicle loans to corporate borrowing rates, the Fed bought up almost $2.5 trillion in financial assets to goose market activity. “The precise timing for the first increase in the federal funds rate is less important to me than the path the funds rate will follow”, said the dovish Evans.
He said the USA housing and employment markets were performing well.
Janet L. Yellen, the Fed’s chairwoman, has suggested the bank would like to raise rates about one percentage point over the next year, implying a level a little above 1 percent at the end of 2016. Fed Vice Chairman Stanley Fischer will give a speech at 6 p.m.in Washington on the transmission from exchange-rate changes to output and inflation. “A second consecutive month of outright deflation certainly calls into question the Federal Open Market Committee’s expectation for inflation to reverse course near-term and head back towards the Fed’s longer-tem objective of 2%”.
“Nobody specifically wanted to say yes to December or no to December”, said John Briggs, head of strategy for the Americas at RBS Securities Inc.in Stamford, Connecticut, referring to the Fed speakers. “This may very well be probably the most dovish tightening cycle we have ever seen, and we do not assume rates of interest can be materially greater than they’re now even a yr from now”. We would also see a healthy inflation of 2% or more instead of the disinflation that has strangled our economy.
As our dollar continues to get strong with the threat of increasing rate, the US has become the magnet for importing deflation just when the Fed wants inflation. However, inflation has remained weak and market-based measures have fallen sharply in recent years.
Dudley, who as president of the NY Fed has a permanent vote on the Fed’s policy-setting committee, said the decision still required the central bank to “think carefully” because of the risk that the United States is facing chronically slower growth and low inflation that would justify continued low rates.
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The expectation that inflation will rise slowly is reason to raise rates gradually, she said.
