Although the labor market and inflation data in August wasn’t impressive enough for the Federal Reserve to introduce a rate hike, data released this month has caught the attention of authorities.
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Upon the release of the minutes of the Fed’s October meeting, Wall Street rallied with the NASDAQ, S&P 500 and Dow Jones indexes closing higher than one percent.
Bullion prices were firm earlier, when expectations that the Fed would take its time raising rates prompted a wave of short covering after prices hit near six-year lows.
Williams sought on Saturday to make clear that rate hikes would not only be gradual, but would not follow the stair-step pattern that characterized the Fed s last policy-tightening cycle, when it raised rates by a quarter of a percentage point at every meeting.
Future inflation trajectory expectations also play an important role in the monetary policy framework of any central bank. If the data remains to be consistent and impresses the central bank, markets are deemed to witness a rate hike, something they haven’t seen in nine years.
In the present, though, he said it was a “close call” at its policy meeting in late October for the Fed to keep the benchmark federal-funds rate pinned near zero.
There’s only one item on the Agenda ” Review and determination by the Board of Governors of the advance and discount rates to be charged by the Federal Reserve Banks”.
Bullard then looked at what the inflation rate would be assuming that oil prices stabilize at the current level and that all other prices continue to increase at the same pace as they have so far in 2015. Trade deficits and surpluses also matter, as do stock-market and property valuations, the cyclical outlook for corporate profits, and positive or negative surprises for economic growth and inflation. However, “Job creation is expected to slow going forward as the economy continues to normalize”, he noted, adding, “Even with job creation as low as 130,000 jobs per month, the employment-to-population ratio would remain constant”.
“You could think about keeping a permanently higher balance sheet, lowering the term premium and therefore actually raising the natural rate of interest in the economy”, Williams said.
A sharp climb in volatility driven by anxious markets in the run-up to the rate hike may just put the Fed on the back foot.
But the Fed’s larger influence on the economy flows from its monetary policy’s effects on long-term borrowing costs, including rates on mortgages and corporate debt.
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The prospect of the first increase for nearly a decade boosted the greenback, but dragged down raw materials and energy shares as the stronger dollar made them more expensive for global investors. Bullard, whose district includes all of Arkansas and parts of IL, Indiana, Kentucky, Mississippi, Missouri and Tennessee, will be a voting member of the committee in 2016.
