Fed Vice Chair Fischer signals rate hike

The USD reaction was relatively muted with the dollar failing to extend on its recent rally, as the market was likely hoping for a more hawkish surprise.

So what are the implications for such an historic decision of the New Zealand economy and markets?

Investors dealt with a range of issues this week, including minutes from the latest meeting of the Reserve Bank, which suggested a rate cut is not really on the agenda.

Many across the markets predict the Fed will raise its benchmark, short-term interest rate at its December 15-16 policy meeting, and the dollar has strengthened already on those expectations. In the United States, initial jobless claims are at 1330 GMT, while leading indicators and the Philadelphia Fed manufacturing survey are at 1500 GMT.

The USA jobs report for October painted a very strong picture of the U.S. economy, generating 270,000 new jobs in October and unemployment fell to just 5% – half its peak before the global financial crisis.

We have argued, and the Fed’s Vice Chairman Fischer emphasized the point earlier this week, the Fed has done everything to avoid surprising the market with a rate hike.

As a result of this, I believe there is still a lot of potential long-term upside in domestic equities as investors get more and more comfortable with the idea of shallow trajectory rate hikes.

Investors reacted to the Fed officials’ comments at the conference by increasing the odds for a rate increase next month to 72%, from 64% on Tuesday, based on interest rate futures prices.

“In other words, the Fed can now literally occupy the board rooms of the largest financial institutions in America and influence how they deploy capital”.

However, there is one snag.

Though the annual increase in the overall CPI remains negligible, core inflation continues to creep higher – approaching the Fed’s 2% objective, according to RBC Economic. If that were to change, and USA inflation and wage pressures were to build, it would remove the luxury of delivering a cautious tightening cycle.

The stock market’s message for Janet Yellen has been that slow and steady on interest rates is preferable to fast and furious.

Under the type of policy rule envisioned by lawmakers, the Fed would commit to moving interest rates up or down depending on the readings of economic indicators like the jobless rate and inflation.

This is a welcome development. It helps with New Zealand’s transition toward a more sustainable exchange rate and is more consistent with the sharp fall in dairy prices since 2014.

Nonetheless, the case can be made that the latest economic data emanating of the U.S. all point toward a rate hike, as the bench marks set by the Fed were met, and in a few cases were surpassed.

It would also leave one less thing for him to worry about over the summer break.

Benchmark 10-year Treasury prices rose 7/32 for a yield of 2.2447%, while the price for the 30-year note rose 24/32 for a yield of 3.0040%. This column does not constitute advice to any person.

Christian Hawkesby is a director at Harbour Asset Management.