Fed’s Williams makes case for December rate hike

There was no increase at the October 27-28 meeting, either, but the minutes from that meeting, released last Wednesday, said that most participants thought that the economic conditions warranting the beginning of a rate-hike cycle would be in place by the December meeting. But Williams did stress that the rate hike will be gradual, and will not be done in the same incremental manner that was a main feature of the Fed’s last policy-tightening regimen, when rates were increased by 0.25 percent per meeting. It is pretty clear that the Fed will deliver a dovish hike.

Furthermore, the minutes from the central bank’s meeting in October show that bank directors seek a rate hike that would bring the underlying discount rate closer to one percent.

“What we’ve seen over the course of this year is a Fed that’s happier to highlight what a stronger dollar means in terms of economic growth, inflation and rates”.

“I wouldn’t be surprised to see prices fall below $1,000 as expectations of a rate hike affect sentiment”, Natixis analyst Bernard Dahdah said. It also has to deal with a rather fragile local economy that will be negatively affected by tighter monetary policy. “Liquidity is beginning to dry up as people are waiting for what happens in December with the Fed”.

The United States labour market has been steadily improving over the past 18 months. “They are moving pre-emptively in expectation of what the Fed is going to do”. Mainly this is because the Reserve Bank finds itself in the hard position of having to meet its mandate of keeping inflation within the target band at a time when inflationary pressures are nearly entirely external.

Another point is that household debt is now very high, which could create problems. Also Fed Chair Janet Yellen has stated that the economy is performing well and is in a sustainable uptrend.

In recent weeks, a number of Fed speakers have said that a rate hike in December was on the table.

RBC highlights the speed of jobs creation is slowing as the slack in the workforce fades away.

A strong USA currency makes dollar-denominated gold more expensive for foreign holders.

Fed vice-chairman Stanley Fischer recently suggested that the question is whether Asian emerging countries, and in fact the rest of the world, is sufficiently prepared for such a decision. This shows that many of them are already equipped for it.

The Fed board opted to hold the discount rate steady last month, a decision that was backed by two other regional Fed banks. The prospect of widening policy divergence between the European Central Bank and the Federal Reserve is likely to continue weighing on demand for the shared currency for the remainder of the year.