Analysts say a strong report may allow the central bank to act at its September 16-17 policy meeting.
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Gold prices broke above $1,150 an ounce, rising to its highest level since July 15 as the U.S. eased in reaction to the minutes from the Fed’s July 28-29 policy meeting. The central bank’s favored inflation gauge showed prices climbed only 0.3 percent in the 12 months through June. 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 global developments.
Read any investment newsletter these days, and you’ll probably find an opinion on the Federal Reserve’s looming interest rate increase.
“By keeping rates so low for such a long period of time, you’re telling everyone to borrow money, to go and buy a flat for instance which, after a while, creates bubbles and those bubbles need to deflate”. It was also noted that a prompt start to normalization would likely convey the Committee’s confidence in prospects for the economy. Although the Feds are confident that the economy is robust enough to handle the rate increase, the bond market remained skeptical. The stock market seems to tumble whenever a Fed official signals the end of zero interest rates, and it’s axiomatic that bond prices fall when rates rise.
But that has not happened yet.
China’s yuan tumbled 1.8 percent on August 11 the biggest decline in two decades when the nation unexpectedly began devaluing its currency. Minutes from the central bank’s July policy meeting, released Wednesday, showed officials are concerned about stubbornly low inflation, leading traders to scale back odds of a rate boost next month.
The Fed is responsible for maximizing employment and fending off inflation as part of its dual mandate from Congress. But domestic payrolls, unemployment, and pricing indexes can move up or down for any number of reasons in any given month, so the minutes play a crucial role in deciphering the Fed’s take on economic progress.
“Many observers have called for the [Fed] to tighten monetary policy by raising interest rates in the near term”, he writes in The Wall Street Journal.
Meanwhile, fresh data continued to paint a mixed view of the U.S. economy.
Right now most US mortgages are fixed for five years. Which means that the risk of job creation slowing down has to be considered.
Upon the previous assumption of an increase in interest rate by year-end, banks were expected to benefit from the lift-off, in turn increasing their net interest income (NII) and improving net interest margins (NIM).
So who cares about the rest of the world?
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U.S. “break-even” rates, a measure of inflation expectations from the difference in yields of nominal and inflation-protected bonds, have rapidly declined in recent weeks, revealing investors’ expectations that the Fed will be unable to retain its inflation target for the foreseeable future, the Financial Times reports. The result would likely be another global recession.
