Federal Reserve Chief Janet Yellen is expected to raise short-term interest rates on Wednesday.
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Mr Bracken will be closely watching revisions to the “dots”, which are the forecasts the Fed releases based on its internal survey of where interest rates will be at the end of 2015, 2016, 2017 and 2018.
The FOMC left the federal funds rate unchanged at 5.25 per cent from June 29, 2006, until September 18, 2007, at which time it lowered the rate by half a percentage point to 4.75 per cent during the financial crisis that year. For some investors, it felt similar to the origins of the financial crisis.
The Federal Open Markets Committee, which sets the U.S. interest rate, is expected to vote to increase rates from the range of 0 to 0.25 per cent to between 0.25 and 0.5 per cent. This small increase in the domestic cost of lending for American banks will push up borrowing costs the world over, as central banks tied to the dollar are forced to follow suit – or experience speculative pressure on their exchange rates. The Fed’s decisions, while couched in the antiseptic language of monetary economics, are unavoidably bound up in hard questions about fairness, race, and inequality.
The market, as measured by the futures forward curve, has always been more dovish than the Fed, although the gap has narrowed.
If the economy isn’t really strong enough to warrant rate hikes, then why do one at all, except as a symbolic “off of zero” gesture?
Of course, the counter to that is, that by doing so too soon, all it is doing is hastening the point in time when it will need to once more cut rates.
Economist Paul Krugman warned that a rate hike “could end the run of good economic news”.
Even so, the Fed has so strongly signalled the decision that it can hardly not raise the rate without scaring markets.
If the Fed surprises the market by suggesting that they could raise interest rates again in the first quarter, the dollar could rise on renewed expectations for Fed tightening.
For others, however, a rate hike will be nothing more than a big lump of coal just in time for the holiday season. If the Fed proceeds, it will be the first time such hike in nearly a decade, and the move will usher in a new era of rising rates, which have hovered near zero since 2008.
At first glance, these price movements seem counterintuitive; a higher Fed-funds rate would increase the return on dollar-denominated deposits, decreasing the spreads between the buck and higher-yielding rival currencies. Writes Scott Wren, global equity strategist of the Wells Fargo Investment Institute: “Nobody is chasing this market as we sit just 4 percent below the all-time record high in the S&P 500”.
Some economists argue the USA economy is still not ready for tighter money, and that there is still no compelling reason to hike – like the threat of inflation. But if inflation starts to rise, then investors might come to agree that rates are too low.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said the increase in medical costs reflected in part a jump in the cost of health insurance, with premiums up 3.6 percent over the past 12 months, compared to a 1 percent drop in premium costs for the 12 months ending in November 2014.
United Kingdom house price inflation accelerated for the third straight month in October to the highest level in seven months, figures from the Office for National Statistics showed Tuesday.
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Right now, global markets have priced in a rate hike for December, market participants say, but not more than a couple of rate hikes for next year.
