Planning Ahead for the Rate Hike

USA stocks capped their best week this year on Friday as investors digested growing signs the Federal Reserve thinks the world’s top economy is strong enough to handle a rate rise next month. The FOMC struck a particularly hawkish tone in the minutes released yesterday, providing markets with a strong degree of certainty that we will see a hike in December.

But with inflation below target, consumer confidence softening and factory activity cooling a little, the worry is that the Fed could be headed into a policy mistake.

The US dollar soared to an eight-month high as remarks by a Federal Reserve official bolstered market expectation for an interest-rate hike by year-end. On a number of occasions, the US Federal Reserve has laid down the prerequisite of an inflation rate of 2% for a rate hike.

“Our concern would be that they then do not go ahead with the December [Federal funds] rate hike”.

In response to a letter from Nader decrying the plight of savers who are suffering from years of exceptionally low interest rates, Yellen notes that Americans would have been worse off if the Fed had not taken drastic action to counter the severe financial crisis in 2007 and 2008 and the ensuing recession.

The Fed should “soon” be ready to raise interest rates as US central bankers grow confident that low inflation will rebound and that employment remains stable, William Dudley, the influential head of the New York Fed, said on Friday. Money managers are holding a net-short position in the metal for first time since August as long wagers shrink to the smallest in seven years.

“I do think the slope is the most important thing to communicate, the pace of increases”, he said, adding that the Fed’s quarterly economic forecasts will be critical in that regard, along with public comments from Fed officials and possible changes to the Fed’s post-meeting statement. Last month, a sharp rise in United States payrolls brought unemployment close to 5 per cent, a rate that many economists consider to be the natural unemployment rate in the US. Is the case for a rate hike, or not, really dependent on one report? During the previous quarters, United States banks struggled to curb costs to protect net interest rate spreads given low interest rates.

A powerful rally has carried the S&P 500 12% above the 2015 lows; less than a 2% move higher from here would put the index back at the highs of the year, near 2130.

The prospect of the first increase for nearly a decade boosted the greenback, but dragged down raw materials and energy shares as the stronger dollar made them more expensive for global investors.

Thokan agrees that the rate tightening cycle will probably be shallow, but he expects more than just a further 25 basis points.