Many will look for signals as Fed raises key interest rate Wednesday

Can Investors Expect a Rebound in Gold under Trump’s Presidency?

If the Fed keeps rates lower than they really should be, that could suppress inflation and prolong economic growth. On Friday, the euro traded close to its lowest levels of 2016 (http://www.marketwatch.com/story/dollar-firms-ahead-of-fed-meeting-next-week-thats-expected-to-bring-rate-hike-2016-12-09) at almost $1.0551, and sinking 1.1% for the week.

Unless everyone in the universe is wrong – which has been known to happen – the Federal Reserve will nudge up short-term interest rates by a quarter of a percentage point Wednesday.

Here in India, there is a chance the rupee might depreciate, which might give rise to a higher current account deficit and higher inflation as the import prices will increase.

A rate hike is typically positive for a currency but in this case the US dollar has hit multi-month highs ahead of the meeting with Fed fund futures showing the market pricing in a 100% chance of a hike.

That scenario of a central bank caught behind the curve and forced to act faster is one that Yellen and other policy makers have said they hope to avoid out of fear it could prompt a recession.

Yellen, though, will likely tread carefully in her assessment of the Trump agenda’s likely impact on the economy, in part because the president-elect’s agenda could undergo significant revision in its path through Congress.

USA two-year notes fell 2/32 in price to yield 1.174 percent, while benchmark US 10-year note prices fell 1/32 and its yield rose to 2.482 percent. But even coming close to that growth rate would nevertheless force the Fed to raise interest rates to contain inflation. The price of Brent crude, the worldwide standard, rose $1.74, or 3.2 percent, to $56.07. First, Trump could yet unravel the North American Free Trade Agreement with Mexico, and deliver on his threat to slap higher tariffs on China. Trump has shown no such hesitancy.

An aggressive anti-immigration policy could also be a problem, as it could bring about a supply-side labour shortage. Business spending and non-energy exports were disappointing but infrastructure spending isn’t evident yet in GDP data.

When the Fed raised interest rates in December 2015, there was a brief continuation before a sharp reversal that took USD/JPY from a high of 123.57 to 116 in a matter of month and 111 in a matter of 2 months.

So, if clients ask, it’s fair to say there are many unknowns. Just dropping the word “roughly” would be seen as an upgrade of the Fed’s economic view – and perhaps a signal that it foresees a relatively quickened pace of rate increases. Nominal US bondholders would see their returns eroded. First, it should probably raise the risk premia in the treasury market, both for nominal and inflation-protected securities.

The nearly certainty of a rate rise from this week’s meeting of the Fed didn’t help, nor did the continuing Trump boomlet in sharemarkets, plus the rising yields on bonds, and a stronger greenback. In contrast, a more dovish set of forecasts would undermine the currency.

Turnill said while markets will be eyeing clues as to how many moves may follow in 2017, the company now expects two rises next year. Natural gas, which often rises with expectations of colder temperatures and increased electricity usage, rose last week to its highest price in two years. Investors have mostly avoided consumer goods makers and health companies in recent weeks.

ANALYST’S TAKE: “A quarter-point rate hike looks nearly certain”, said Jim O’Sullivan of High Frequency Economics in a report. But not everyone is certain he has the policies to deliver it.

Investors were quick to decide that Trump equals growth.