Atlanta Fed president Dennis Lockhart recently signaled a similar approach, flagging “direct evidence” of inflation rising as his hurdle for future rate hikes.
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Stock market investors are braced for panic selling in NY and London before what is expected to be the first rate rise by the US Federal Reserve since 2006. Stock prices usually fall from interest rates rise.
“We think the rate will move up very slowly -probably 25 basis points (a quarter of a percent) in December and maybe 1 percent for all of next year”, said Rebecca Rothstein, a managing director of wealth management with Merrill Lynch. Unemployment has slid to 5 percent and hiring has advanced at a solid pace, with employers adding 211,000 jobs in November and 2.6 million over the past year.
There is also a strong effort to move monies away from physical assets like real estate and gold to financial assets, and thus savers are being incentivised by being offered rates of return that are higher than inflation. (“Indeed, 82% of economists surveyed said they thought the Fed’s credibility would be damaged if it didn’t raise rates next week, up from 65% who said so last month”, the Journal wrote). October was the best month for new American jobs in 2015, and November outpaced expectations.
But for many City and financial services workers, it will mark an altogether new experience.
Others argue that it’s still too soon for the Fed to be considering a rate hike.
Falling commodity prices have fueled a global disinflationary trend and pushed Indian inflation down, giving the RBI room to ease monetary policy four times this year, but rate cuts could now be less forthcoming.
In the coming week the main focus of the markets will be on the Federal Reserve.
“You’ll see a little uptick in things like mortgage rates”, said Nariman Behravesh, chief economist at IHS Global Insight. “It will be a slow adjustment”. If you own CDs, their rates will increase immediately if the Fed raises the benchmark. In the futures market, traders have been betting that five-year rates will head higher in months to come. Yaylaci forecasts that rates will peak at 3.25 percent in late 2018 and remain there into 2020. Some courageous moves are required from it and actions need to be taken now.
Higher interest rates will increase the interest expense of companies (making them less profitable), reduce the amount of money investors borrow to buy stocks (less demand for stocks), and increase the cost of public stock buyback programs (taking away an important built-in floor for the stock market).
The views range from six at the most hawkish end to the “one and done” theory.
Another component of Yellen’s gradual tightening strategy is about when they will begin reducing the size of their $4.5 trillion balance sheet.
The same goes for loans with variable rates. “Nobody is expecting astronomical increases”. As for the many young money managers who have yet to live through a rate-hike cycle – Gundlach warns: “It’s a different world”.
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There is no doubt that rock-bottom interest rates and three rounds of QE have helped the United States economy to get back on track, however the strong USA dollar dogged the corporate reporting season and the slowdown in emerging economies has yet to be fully played out.
