Asian shares, dollar rise on expectations of U.S. rate increase

There has been chatter in the market that FED might hike discount rates today, which though not related may be another very strong indication that FED is ready to hike rates in December. Mr. Williams is a closely watched policy maker who often signals the Fed’s consensus position on monetary policy.

Williams sought on Saturday to make clear that rate hikes would not only be gradual, but would not follow the stair-step pattern that characterised the Fed’s last policy-tightening cycle, when it raised rates by a quarter of a percentage point at every meeting. The minutes reiterated the expectation that interest rates would rise at its December meeting, however, U.S. Dollar investors expressed concerns about the timing of future rate hikes.

The local currency dropped to 61.35 euro cents from 61.63 cents on Friday in NY, having climbed to a month-higher after European Central Bank president Mario Draghi said the monetary authority will do what it takes to raise inflation in the region, stoking speculation it will expand its asset purchase programme.

Higher retail inflation, coupled with the possibility of a U.S. Fed rate increase in December, may prompt the Reserve Bank of India (RBI) Governor Raghuram Rajan to keep the repo rate unchanged in the December policy review.

Bullard then looked at what the inflation rate would be assuming that oil prices stabilize at the current level and that all other prices continue to increase at the same pace as they have so far in 2015. “The data show that the hiccup we saw in a couple of labour reports has reversed”, he said.

The Department of Labor in the US reported that hiring rebounded during October after weak reports for August as well as September.

Bullard said that the unemployment rate has fallen faster than the FOMC expected, and that nonfarm payroll employment has increased faster than anticipated.

NY Fed President William Dudley told the NY conference he does not expect a “huge surprise” or major market reaction to a hike in part because it has been so loudly telegraphed.

This will be the case provided USA economic data remains encouraging, the Fed official predicted. The central bank had also emphasised the need for pro-active supply-side management by the government to head off any food price pressures, especially in respect of onion and pulses.

In deciding when to normalize interest rates, the Fed has placed considerable weight on the weakness of inflation, and its global underpinnings. For several years after the recession, most standard policy rules said the FOMC should cut rates well below zero, if that were possible. The Fed futures rates suggest a 68 per cent probability of a rate hike in December 2015 and this has risen from 35 per cent till as recently as October 27.

Bullard’s comments on Friday back up a message the Fed has been sending for weeks – that the Fed is seriously considering raising rates in December and wants markets to be prepared for the move.