“We just have to turn this aircraft carrier around, get out of this zombie-like economy which is being fed on an elixir of low interest rates and get to a process of normalization”. Of the remaining banks, potential candidates to join the discount rate hike, the Boston and Atlanta Fed’s are possible.
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In recent weeks, a number of Fed speakers have said that a rate hike in December was on the table.
Jeffrey Lacker, president of the Fed’s Richmond bank, said in a CNBC interview on Wednesday that he believed that any economic impact from the terror attacks last week in Paris would be temporary.
Expectations of higher borrowing rates going forward is considered bearish for gold, as the precious metal struggles to compete with yield-bearing assets when rates are on the rise.
A discount rate hike can be seen as a technical adjustment as part of the normalization process to have a wider spread between the Fed funds target and the discount rate.
Central bankers use the neutral rate to guide their actions when setting interest rates.
It is a similar situation in emerging markets, which have seen central banks from Indonesia to Brazil pulling back from tightening monetary policy because of growth concerns.
Williams sought on Saturday to make clear that rate hikes would not only be gradual, but would not follow the stair-step pattern that characterised the Fed’s last policy-tightening cycle, when it raised rates by a quarter of a percentage point at every meeting.
A rapid Dollars rally should be expected from a discount hike today – even if the rate is little utilized by banks – but it is uncertain whether such gains would last as the impact on equity markets must also be considered.
The Fed sent its strongest signals to date that it might raise its rates Dec 15 and 16 during a policy meeting. The tighter monetary policy would diminish the supply of USA dollars floating around in the economy and help the greenback appreciate against foreign currencies. It has since recovered, but remains vulnerable, analysts said. The stronger United States dollar is equivalent to two or three rate hikes, said Fidelity worldwide global economist Anna Stupnytska. So far markets have been right, but there is a growing view that this dynamic changes next year.
The journey back to normal interest rates will most likely begin with a small step next month.
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“The rhetoric from the Fed suggests numbers would have to fall off a cliff to stop an interest-rate rise in December”, Michael McCarthy, chief markets strategist in Sydney at CMC Markets, told Bloomberg News.
