The Governing Council meets in Frankfurt on December 3 for its next monetary-policy decision.
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But with inflation below target, consumer confidence softening and factory activity cooling a little, the worry is that the Fed could be headed into a policy mistake.
The Fed will make its decision on a potential rate hike during the next meeting of its Federal Open Market Committee, which is scheduled to run December 15-16. That will have a negative impact on the currency and it is therefore necessary to provide some protection.
Although the Fed’s targets for the U.S. labor market have largely been met and its price goals should be met over time, Lockhart said that didn’t mean the economy is in the clear, or it will function as it did before the 2007-2009 financial crisis. Indeed, as the chart below shows, the latest published EFF is at just 0.12% and the 30-day average EFF continues to tick lower.
“It is very much dependent on the US Federal Reserve”, says Nadir Thokan, investment strategist at 27Four Investment Managers.
‘If that is the case, my colleagues and I have indicated it will be appropriate to begin to normalise interest rates’.
Indeed, quite a few recent updates related to macroeconomic indicators reflect the market’s apparent affinity to an imminent rate hike. They think the Fed should hold off for a bit longer.
First, he asks the question why the Fed will be hiking when there is “only moderate growth in the economy as a whole, stagnation in the industrial sector, and an uncertain global environment?” Outflows will see the rand weaken and therefore see the inflation outlook deteriorating.
“An overly aggressive increase in rates… would at undercut the economic expansion, necessitating a lasting return to low interest rates”, Yellen said in the letter. Most economists expect the European Central Bank to review policy in December and extend its program of quantitative easing, with some even anticipating another cut to the overnight cash rate.
The first sign that the rate hikes in the next year or two could be slow and shallow, is simply, the state of the U.S. economy. In addition to currency weakness, he points out that the break-even on government inflation-linked bonds is now around 6.65%, which indicates that the market is expecting inflation to peak around that level in the coming year.
Some directors favored an increase as they thought an earlier start to policy normalization “could allow for a more gradual pace of adjustment”, the minutes added. Now, if the USA dollar gains more strength against speculative behavior on the part of investors in light of the rate hike, it could put pressure on the repayment ability of these nations. Boston Fed chief Eric Rosengren will be a voter in 2016.
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That comes in a truncated trading week with United States markets closed for the Thanksgiving Holiday on Thursday, pushing U.S. economic data to a Wednesday release. I don’t believe so.
