Evidently, the people looking for a rate hike didn’t read the minutes from the July meeting that were released Wednesday.
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The notion that the Bank has been deliberately keeping rates low in order to subsidise borrowers at the expense of savers has gained some traction, yet it is based on a misunderstanding of the objective of monetary policy.
“Most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point”, the minutes said, summarizing the opinion of the committee members. Several of these participants cited evidence that the response of inflation to the elimination of resource slack might be attenuated and expressed concern about risks of further downward pressure on inflation from worldwide developments.
Now if economic activity also results in a pickup of inflationary expectations, then an even higher normalized nominal federal-funds interest rate should be called for. McBride, though, doesn’t think the first couple of increases will have much effect.
Since the markets have spoken, what is the Fed waiting for?
The Labor Department reported on Wednesday, August 19, that the consumer-price index increased by a seasonally adjusted 0.1% in July from a month earlier and on the year-on-year basis, CPI was just higher by 0.2%.
But that has not happened yet.
Underscoring the collapse in inflation expectations, the difference between yields on 10-year inflation-indexed securities and nominal notes, known as the break-even rate, dropped to 1.53 percentage points, the lowest since January.
The Fed’s actions have taken on heightened importance in recent years as investment strategies became increasingly tied to the “power of central banks“, after the financial crisis, Hartnett said in the report.
Someday soon, maybe in a month, the U.S. Federal Reserve will probably raise interest rates for the first time in almost a decade. The minutes made clear that officials needed more data before deciding – but also that they wanted to ensure everything was ready to go if they did. If inflation is running at 2 percent and the bonds pay 4 percent, the “real” rate of return is 2 percent.
I don’t mean to be snarky about the Fed here.
But although the central bank has indicated the next rate hike is getting closer, the latest data suggests there should be no hurry.
Many investors and economists see the Fed as most likely to start the rates “liftoff” next month as unemployment falls below its targets. Japan, meanwhile, has reduced investment in U.S. securities by $17.8 billion to $ 1.197 trillion.
The year-on-year increase in the core inflation rate reflects larger mortgage and rent payments.
The simple fact is that global capital has been exiting the developing world at an impressive rate.
A similar picture has emerged over the past year in the United States, which is different from that unfolding in Canada.
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Erik Schiller, senior portfolio manager at Prudential Financial Inc.’s fixed-income unit, said the Fed’s decision to raise interest rates against sluggish global growth may be “premature”. After a 10-month investigation by five U.S. regulatory agencies, the cause remains a mystery. While the amount is small, it can pose significant consequences to U.S. manufacturing and export businesses.
