The Week Ahead: Federal Reserve Guidance On Rate Hikes Key

FXCM Israel research department said in its market review this morning, “The shekel-dollar exchange rate is treading water around NIS 3.85/$”. It’s about what it will say. The Fed has made it pretty clear that they intend to raise rates at their meeting this week, ending a long period of speculation as to the timing of a rate hike.

On that, pretty much everyone agrees. It could also roil financial markets. We will want to hear much more from the candidates – especially on how to restore more robust growth.

The Fed, which has held its benchmark short-term rate near zero since the end of 2008, is expected to boost it by a quarter-point at its policy meeting Wednesday. While higher rates generally result in less borrowing and thus may have a dampening effect on economic activity, these rate increases must be taken in the proper context. The traditional fed funds rate is then expected to float within this new corridor.

All of that suggests that, in the forex market at least, there is an element of “buy the rumor, sell the fact” to the current movement, but equity investors should still exercise caution this week.

To be sure, the economy – both in the US and overseas – faces a series of headwinds from weakening growth in China to the collapse in oil prices that is hammering American oil and gas producers in energy-rich parts of the country.

Here’s what to look for when the Federal Open Market Committee releases its policy statement at 2 p.m. Wednesday following a two-day meeting in Washington.

I wasn’t able to find the correlation between mortgage rates and the federal funds rate, though if I spent enough time looking for it I have to believe I’d eventually find it. However, I did find this great graph that compares the two rates going back to 1990 in The Mortgage Reports. According to Freddie Mac’s national survey of lenders, the 30-year fixed-rate average was 3.95 percent last week.

Keeping rates too low for too long can inflate asset bubbles as investors seek returns that are higher – but riskier – than returns on government debt. “But if the Fed capitulates on the four hikes, that would be seen as a dovish hike”.

Surrounding the mortgage-driven economic collapse of 2008, the Federal Reserve loaned banks billions of dollars to provide the liquidity needed to keep afloat and to make lending possible. It had gone up less than a half percent even though the benchmark rate had climbed from 1.25 percent to 5.25 percent. “The fed funds rate is tied to what the prime rate does and that’s about three percentage points above the fed funds rate and that links to credit cards”, Conway said.

Interviews with the Fed chief’s former colleagues paint a picture of Yellen as a pragmatic economist who is ready to adjust course when necessary, but one who relies on data and economic theory rather than guesswork or hunches. Whenever interest rates rise, bond prices fall. We may have seen a bit of that the last couple of years.

Gross domestic product expanded during the July-September quarter at an annualized pace of 2.1%, revised up last month from an initial estimate of 1.5%. Central bank officials have tried to convince the public that they do not plan on stair-step increases, emphasizing that they can move more quickly or more slowly, depending on the progress of the recovery.

“Have your coffee first thing and make sure you get plenty of rest because it’s going to be kicking off this week”, said Craig Collins, managing director of rates trading at Bank of Montreal in London. When mortgage rates were at record lows during the financial crisis, nobody wanted to buy a house because the economy stunk [so] I don’t have this concern that it’ll put a dent in housing.

To cut through the noise, investors will have to consider what matters and what really doesn’t when it comes to the first USA rate hike in almost a decade.

Be proactive – Use the “Flag as Inappropriate” link at the upper right corner of each comment to let us know of abusive posts.