A shock pay slowdown hit the pound today as the City bet against the Bank of England following its USA counterpart with an imminent rate rise.
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To be considered a success, the Fed needs its rate hike to be followed next year by continued USA growth, continued low unemployment, and, perhaps most in doubt, a turn higher in inflation. The current Wall Street Journal Prime Rate, based on surveys of large banks, is 3.25 percent.
The absolute centre of the dartboard is U.S. bonds and interest rates, the benchmark by which everything is priced, he says.
History is filled with cases, from the Fed in the 1930s to the European Central Bank in 2011, when central banks raised rates prematurely, sometimes with dire consequences.
Just as turkeys are opposed to Christmas on culinary grounds, so investors in risky assets like junk bonds are forever and always against interest rate hikes. Boston Fed President Eric Rosengren, for one, thinks the Fed would have to seriously consider increasing its inflation target if it returns to the lower zero bound next recession.
A rate increase is finally coming.
In arguing that it is time for a rate increase, Gagnon pointed out that employment growth has been steady throughout the year, but Ubide said without a pickup in inflation the Fed could hold off on raising rates. “What’s the way forward”, says Ofer Klein, head of Harel Insurance and Finance’s economics and research department. The problem now isn’t that prices are rising too fast. Using Eurodollar futures, for instance, to glean the market’s view of the longer-term path of Fed policy involves estimating the so-called basis, or gap, between Libor and Fed funds rates. Read: What time is the Fed decision?
The question on what the decision, economic forecasts and Fed chair Janet Yellen’s press conference will do to currency markets is, in all honestly, the most uncertain part of the entire event.
“Essentially, no one should really be spooked by the prospect of investors losing money from having taken risks that didn’t work out”, George Magnus, senior economic advisor to UBS writes.
“So, I wouldn’t expect to see a dramatic shift in the economy”, George said. The federal funds rate is the interest rate banks charge when loaning money to each other, and the Fed sets a target range because it can’t directly manipulate the federal funds rate. She might be able to do so by accompanying a rate hike Wednesday with assurances that the pace of future moves would be modest and gradual and would occur only if the economy further improved.
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The unemployment rate has also fallen sharply this year, from 5.7 percent in January to 5 percent in October, holding at that same level in November, according to the report by the Labor Department on December 4.
