Louis Fed president predicts slow interest rate increase

Indeed, the Fed chose to delay raising interest rates partly because United States policymakers expect dollar appreciation, by lowering import prices, to undermine their ability to meet their 2 per cent inflation target.

The Federal Reserve (the Fed) is widely expected to start raising interest rates during its meeting in mid-December 2015 for the first time since 2006.

Speculation that the Federal Reserve will lift interest rates for the first time in almost a decade this year has intensified since the release of strong U.S.jobs data earlier this month, which triggered a sharp drop in gold prices.

The U.S. Labor Department reported a rebound in hiring last month, after weak readings in August and September.

Hatzius and his colleagues characterise the USA as undergoing a “Tortoise Recovery” but say that they “expect the committee to raise the funds rate by 100bp next year, or one hike per quarter”. A suggestion in the minutes of the Fed’s last meeting that the bank would move cautiously on rates prompted the short covering.

“The market-based probabilities of a near-term end to the zero interest rate policy have increased”, Bullard said, adding, “While any decision will be data dependent, as always, a few key questions loom for the FOMC”. The European Central Bank reviews monetary policy next week. The “weakness reflects common longer-term forces slowing the potential for growth in many countries, including lower productivity growth, high public and private debt levels, aging populations and a hangover from post-crisis investment booms in many emerging economies” (IMF report dated September 2015). If the final number does show more strength than the forecast, we could see another leg higher for the sterling against the basket of currencies.

One other possible central banking tool would be to loosen policy by targeting higher inflation rates, Williams said, although the effectiveness of such a move is unclear given stubbornly low inflation rates worldwide and the inability of many central banks, including the Fed, to reach even their current inflation targets.

Spot gold was up 0.1 percent at $1,082.90 an ounce at 1445 GMT, while USA gold futures for December delivery were up $3.70 an ounce at $1,081.60.

“Oil price stabilization likely implies headline inflation will return to two percent in the USA”, Bullard predicted.

The South Korean won rose 0.7 percent, Indonesia’s rupiah added 1.2 percent and the Malaysian ringgit put on 1.4 percent. “This has generally been viewed as a drag on USA economic growth during 2015”.

“The Fed’s already mentioned in a few recent statements that they are concerned about the impact of a very strong dollar”, said Lutz Karpowitz, a senior currency strategist at Commerzbank AG in Frankfurt.

He then explained that since “foreign exchange markets are forward-looking and foresee most or all systematic movements in economies, including predictable policy movements”, only unexpected developments could cause further sharp movements. The central bank has projected 5.8 per cent inflation for January 2016.