How could the Fed’s decision affect markets and politics as the world moves into 2016?
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UBS expects four 0.25 per cent rate increases, every other meeting.
With a still-soft, sputtering economy, it means the next president will have to deal with economic realities and all of Barack Obama’s economic policies without the Federal Reserve subsidy the president enjoyed for seven years.
The US Fed policy meet on Dec 15-16 is expected to result in the first rate hike in nearly a decade, ET gives a lowdown on the likely impact on Indian markets.
If the Fed is wrong on inflation picking up, Mr Krugman wrote in the New York Times, “a rate hike could end the run of good economic news”. Many now working on Wall Street were not even around for the last so-called “hiking cycle”. Now that the labor market looks strong and the economy appears to be on a steady upward trend, the Fed is now focused on preventing inflation.
“A big negative of raising rates is the housing markets”.
1 Year Dollar Index.
Saturday’s releases followed others last week showing the yearlong slide in imports is moderating and that consumer inflation is picking up. “Certainly the worldwide concern has been downplayed in policy speeches since then”, Paul Donovan, Managing Director, Global Economist, UBS Investment Bank told Gulf News. Moreover, the core figures have been reassuringly improving throughout the year. Fed economists have described the current levels as “superabundant”. This is unwelcome news for the USA energy industry as declining oil prices have already put high-cost producers, especially the fracking sector, on the ropes financially.
USA monetary policy has been in an emergency setting since the 2008 financial crisis. This has been backed up by the US Treasury market reactions to the start of past hike cycles.
Bank have been complaining, after all, that low interest rates are hurting their net interest margins, a key measure of profitability. “The effect on shorter term, high-quality bonds should be minor”. “There’s just no serious work being done on the nonlinear realities of how the market will move on a rate hike”. However, inflation in the USA is not just determined by domestic demand.
She has also noted that the risks of delaying a rate hike exceed those of waiting. It will probably lace the first rate hike with dovish language and lower the trajectory for the peak in interest rates closer to 3 per cent from 3.5 per cent. Markets may even doubt whether this will ever be reached.
“Rates are not likely to rise as fast as they would like”, Swonk says.
Much like how the first dusting of snow isn’t what cancels school and ties up traffic but does signify the beginning of winter – that’s really where we are from an interest rate standpoint.
“There are some pretty widely varying views on whether the Fed is ahead or behind the curve and whether inflation is going to pick up very quickly”, said Michael Hanson, senior economist at Bank of America Corp.in NY. The yield dropped 10 basis points on December 11, when it touched 2.12 percent, the lowest since October 29. Right now the Fed has a target range of 0-0.25%.
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Economists in the survey are more optimistic, with their median estimate showing the equilibrium real interest rate at 2 percent. The central bank cuts rates to spur borrowing and spending when the economy is weak, and raises them when the economy strengthens to keep it from overheating and sparking high inflation. Over time, as interest rates begin to approach normal levels, these rates will go up, but it won’t happen overnight.
