Gold price rises, subdued trading likely ahead of Fed decision

Head of global asset allocation Alain Bokobza says looking at the 2016 panorama, in which USA interest rates tighten and the economy fares reasonably well, “that does not argue for a higher gold price”. Past surveys show that many economists expected the first hike to be in 2010.

Yet that won’t be the only news from the Fed.

“US interest rates are also important with respect to the value of the U.S. dollar, in which most commodities are priced”.

Brace yourself: News outlets are about to hit you hard with coverage of the Federal Reserve’s decision Wednesday on interest rates. It is to be followed by a news conference by Fed Chair Janet Yellen to elaborate on the United States central bank’s latest policy statement.

One of the Fed’s dual mandates is to maximize employment. However, a USA rate increase tonight and the attendant dampening of American demand for Canada’s major export – Black Gold – would surely see the Loonie incur fresh losses and perform on a NEGATIVE bias.

A majority of investors believe the second rate increase will come in June 2016, according to the CME Group FedWatch tool. What should give the Fed pause is the asymmetry of the risks – at this point in time, the threat posed by unanticipated inflation pales in comparison to the danger of stunting growth, ‘ Oladimeji said. The problem now isn’t that prices are rising too fast.

This is problematic because too-low inflation may signal underlying economic weakness. That would increase interest charges, requiring consumers to shell out more money before they can be debt free.

Hong Kong’s Hang Seng advanced 2.3 percent and the Shanghai Composite Index in mainland China rose 0.7 percent. Testifying to Congress this month, Yellen suggested that inflation was being held back by shrunken energy prices and a higher-valued dollar, which reduces import prices. “The economic data is really all over the place”, he said.

“And this would be much more serious than a modest uptick in inflation because it’s not at all clear what the Fed could do to fix its mistake”.

Rates were slashed the near zero level after Lehmans went bust in 2008 in a bid to prevent the financial crisis spiralling out of control.

Though some in the markets question the ability of the USA economy to withstand higher US interest rates, there is relief that the uncertainty over the Fed’s intentions is coming to an end.

Historically, noted John Normand at JP Morgan Securities, “Macroeconomic and market conditions have rarely looked so fragile ahead of the first Fed hike”. They’ll also want to see whether she’s concerned about problems that could result from a divergence in policy among central banks: Once the Fed raises rates, it will be at odds with some of its counterparts, including the European Central Bank, which are trying to lower rates. Yellen is expected to keep the emphasis on a slow and incremental pace for additional hikes. When the Fed raises its key rate, the cost of all other kinds of loans, from mortgages and auto loans to credit cards and small business loans, will also likely go up.

It will be the first time in more than a decade the United States has raised rates. Last month at a House Financial Services Committee meeting, for example, she characterized a rate increase in December as a “live possibility” if the economy stayed on track, which it has, as evidenced by the latest jobs report. The 0.6 percent monthly decline was markedly more than the 0.1 percent drop anticipated in the markets.