In last week’s decision to raise rates, Fed officials indicated that full employment is getting closer, with the jobless rate now at 4.6 percent.
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Just before Yellen spoke to graduates, the Federal Reserve released a survey conducted in December 2015 that found that young people are increasingly optimistic about the future.
About 2.25 million net new jobs were created over the past 12 months. If the inflation rate were to stop inching towards 2% or if inflation expectations are lowered, the pace of rate hikes, if any, may be slowed. This effectively means that this member expects only one rate hike over the coming three years. Thirty-five year trends don’t change easily. Core inflation, which strips out volatile fuel and food, is at 1.7 percent – higher, but still not where the Fed wants it.
Among the sectors the industrial sector was down last Thursday by 1 211 points or 1.68 percent (2percent for the week), financials lost 717 points or 1.8 percent (2.1 percent), while the gold index tumbled 8.62 percent (3.8percent). For about a year, markets have discussed, debated and anticipated the impending rate hike. With the notable exception of China and Malaysia, foreign reserve levels and current account balances have improved since 2013, particularly in the case of Indonesia and India, focal points of investor nervousness three years ago. This was a unanimous decision, as the growing chorus of dissenters from previous meetings finally got the interest rate hike they were looking for. “The Fed overestimated what they thought the growth was going to be for 2016”. Further, what if the Fed’s importance as a central bank diminishes, “at least in the near term”? Despite this raft of data, markets will likely continue to overlook short-term focused monthly data releases in favour of the broader political and macroeconomic picture, with two rate hikes from the USA now fully priced in for next year. This is good news.
Bond yields are largely a function of inflation expectations. Although interest rates continued to rise last week, investors remained attracted to corporate bonds and corporate credit spreads continued to compress.
The Fed’s forecasts have been wide of the mark for years (it had previously forecast three hikes in 2016) but bond-market investors seem to be buying the Fed’s view more so now than they have over the past several years, and that has pushed US bond yields sharply higher.
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The sharp rise in the dollar is occurring amid a significant drop in foreign purchases of local bonds in emerging Asian markets.
