Without doubt, the time is ripe for the Fed to hike rates beginning December, but if nervous markets were to come in its way, it will not be the first time the Fed is being held hostage by markets.
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Delaying a rise “could increase uncertainty in financial markets and unduly magnify the perceived importance of the beginning of the policy normalisation process”, the minutes said.
Eight Fed banks had voted to raise the discount rate at the prior meeting in September, a jump from five in July and August.
Importantly, Yellen in her November 4 testimony indicated that she herself expected that inflation will rise to the 2 per cent target in coming years, and so the release of the wage inflation data for October could only have reinforced that expectation. But with economic data painting a lukewarm growth profile in recent months, along with low inflation that remains well below the Fed’s 2% target, there are no smoking guns in the cause of squeezing monetary policy.
The US labour market has been steadily improving over the past 18 months.
Precious metals rose 1 percent on Thursday, rebounding from near six year lows as indications from the U.S. Federal Reserve that it may move cautiously into the rate hiking cycle weighed on the dollar and prompted investors to cover short positions.
Jobless claims have also bottomed out to the lowest level in four decades, suggesting that people who are looking for jobs can get them.
So, how will this parlour game play out? It touched US$1.0593, the strongest since April 15.
As a result the premium offered by USA paper yawned out to 130 basis points, the fattest since 2006. For the moment, it doesn’t appear that the central bank is laying the groundwork for a rate hike. Post the global recession, capital increasingly moved away from the USA towards riskier emerging markets in search of higher returns. “Whether we see dollar weaken this time round, though, is a question mark, since other central banks will probably take a while longer before they start to raise interest rates”, said head of fixed income at GAM in Zurich, Enzo Puntillo.
The dollar declined on Tuesday in Asia, weighed on uncertainty over the pace of anticipated US interest rate increases. The dollar was a whisker lower against the Japanese currency at 122.83 yen. For several years after the recession, most standard policy rules said the FOMC should cut rates well below zero, if that were possible.
Therefore, expect the pace of hikes, which will kick off in December, to be slow – very slow. That’s up from 50 per cent at the end of October.
New Zealand’s two-year swap rate was unchanged at 2.72 per cent at 5pm in Wellington, and 10-year swaps were also steady at 3.6 per cent.
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The journey back to normal interest rates will most likely begin with a small step next month.
