As rate hike nears, Fed’s hints on future to be scrutinized

So as the Fed prepares to raise interest rates from near zero as soon as next week, bond investors are on edge. Rates peaked at 5.25 percent in mid-2006.

Mortgage rates, which are not tied directly to the Fed’s benchmark, have ticked up in anticipation of Fed’s action to a national average of just under 4 percent for a 30-year-fixed loan, according to Freddie Mac, the government sponsored mortgage company. With inflation very much under control it seems obvious to increase rates at this time. In the tightening cycle that began in June 2004, policy makers raised rates more than 2 percentage points in a year, to 3.25 percent from 1 percent.

The reasons for the worry, Kelly told us, is that the Fed simply isn’t putting in the work to understand a hike beyond the basics. It’s hard to predict how the market will react to such a momentous change.

Yes, after a full seven years of pegging the federal funds rate at a never-before-seen zero, the Fed – barring any disasters or last-minute political wrangling – will nearly certainly announce a rate raise Thursday. And so, the Fed is expected to say the “pace of job gains has picked up”, instead of saying it “has slowed”. Even now, high-yield bond prices are at levels usually associated with a recessionary environment. An increase is likely as futures markets indicate a 79% probability of a rate hike to 0.50%.

In addition, “Housing is another area where rates are starting to rise but they are at low rates and demographics support housing”.

Policy makers have added stimulus as growth slowed from 7.3 per cent a year ago to 7 per cent in the first half and to 6.9 per cent in the third quarter.

“And because real estate is more sensitive to interest rates, expectations of higher rates have a bigger impact on real estate than most of the economy”.

But Ms Yellen practically has to increase rates.

“That could get people to buy sooner rather than later, which could drive prices up even more next year, which is what I am anxious about”, he said.

EM equities will be also be exposed to complications arising from (a) U.S. rate normalization, (b) still exuberant valuations in India notwithstanding earnings downgrades sustaining for six years, (c) growth-sensitive EMs like India trading at more expensive valuations (growth adjusted) than developed markets like the USA, and (d) the narrowing growth differential between EM and developed markets.

This is because the United States economy still looks a long way from producing the kind of inflation that would justify raising interest rates more aggressively. This will, in turn, affect longer-term rates, such as mortgages and corporate debt. A rate rise is seen as the last thing needed in that sector. “To maintain their stability vis-a-vis the dollar they will in turn have to raise their own rates”, thereby losing a growth-boosting monetary tool, explains Garnier.

“If they don’t go, that sends the wrong message about confidence in the economy”.

When there was heightened speculation about an increase in the US rate in September, Seoul’s main bourse Kospi showed a 1.8 percent rally from Sept. 1 to 17, while the secondary tech-heavy market Kosdaq slid 2.3 percent. Oil has stolen the headlines, but across the mining world prices for everything from iron ore to copper are plunging.

“You’re seeing a complete decimation of commodity prices right now”, Walters said. While IOER has been successfully implemented over the past five years, there is a great deal of uncertainty over whether the RRP will provide a solid floor.