These Seven Charts Can Help You See What The Fed Is Doing

Here’s a chart that one of our readers helped us compile overlaying the Fed Funds rate with USD/JPY.

The US central bank is expected to increase interest rates from their current 0pc to 0.25pc range, in what George Osborne, the Chancellor, has called the most anticipated decision “in living memory”. That note reacts to the stock market, inflation and the overall economy – all of which can be influenced by Fed rate policy.

Chinese stocks opened mixed on Tuesday, with the benchmark Shanghai Composite Index down 0.07 percent to open at 3,518.13 points.

Since they can’t charge negative rates of interest, the next best thing is having all rates move back up, so that the net interest margin can stop being squeezed against that zero lower bound and go back to something like normal.

In recent weeks, the dollar has weakened against its main rivals while U.S. Treasury yields have declined. Still, it appears that investors aren’t fully positioned for a rate hike, however, with markets apparently taking a wait-and-see approach. Lower oil prices could trigger deflation fears, a bad sign for gold that is often seen as an inflation hedge.

“Given the Fed’s reluctance to raise rates over the past 12 months, it’s much more likely that after raising rates, they’ll adopt a significantly dovish tone and stress that they have no intention of raising rates at any particular [rapid] pace going forward”, Doug Borthwick, the head of currency trading at Chapdelaine & Co.

TANNENBAUM: The numbers on inflation certainly would not, on the surface, support a raise in interest rates.

The Federal Reserve begins meeting on Tuesday (Dec 15) to weigh a landmark interest rate increase that will signal the end of more than seven years of crisis-era, easy-money monetary policy. The simple story is that central bankers, who pride themselves on choosing the hard right over the easy inflationary wrong, tend to look for any excuse to end zero interest rates, even if they have to invent one. Given how sensitive [Dr] Yellen is to market reactions … they’ve flagged that they’re going to raise rates and it’s going to be gradual. In other words, since the odds are high that the Fed will hike rates, investors have already taken positions to reflect the move. Combined with expectations for future rate moves, it also guides longer-term interest rates which affect how much people pay on loans to buy homes and cars, how much businesses pay on their borrowings, and how much banks pay for deposits. “Then till the jobless rate fell to 6.5 % or inflation rose above 2.5 %”.

Of course, there are also risks that the Fed could surprise investors, either on Wednesday or next year. OPEC countries, determined not to lose market share, refuse to cut back production while the United States is producing more.