Strong case for interest rate rise

News of a previously unscheduled meeting of the Federal Reserve’s governors today, Monday, is inevitably leading to speculation that some United States interest rates could be increased well before next month’s regular meeting of the Federal Open Market Committee, which sets the benchmark Federal funds rate. Central banks traditionally aim to cut interest rates below that level to stimulate their economies, but have less room to do so when the natural rate is low. Consumer prices fell 0.1 per cent from a year ago, the same rate of decline as in September. The dollar index last stood at 99.710 .DXY .

“The markets are still quite euphoric on the increased prospects of Fed rate hike in December, which prompted bullish Dollars positioning”, said Bernard Aw, market strategist at IG in Singapore.

Requests to change the rate can be used by regional Fed banks to signal a policy preference. The last cycle was June 2004 to July 2006 and the Fed hiked 425 basis points.

“In years past, the only people that have talked about the dollar were in the [US] Treasury and the only thing they would say is a stronger dollar was in the US’ interests”, said Daragh Maher, head of USA foreign-exchange strategy at HSBC Holdings PLC in NY.

“Focus is shifting to when the second rate hike would be, and how many times the Fed could hike rates next year”.

It’s almost universally accepted that when the Fed raises short-term interest rates, long-term interest rates will go up, too.

The results show that primary dealers believe the neutral rate-the borrowing cost, adjusted for inflation, that keeps the economy at full employment with stable prices-is now around zero, and will rise more or less in a straight line to 1.5 percent by the end of 2018. A rebound in oil prices would lift inflation towards the Fed’s inflation goal. “And Fischer’s speech is part of that strategy”, he said. “When you look at the dollar against the majors, you sort of wonder what’s left in terms of new information”.

I personally don’t think Fed meetings should be exciting.

But Fed Chair Janet Yellen warned this week in a strong letter opposing the bill that it would politicise monetary policy and “severely damage the US economy were it to become law”.

“We’re coming off a very strong performance, a market that has shown tremendous resilience and a strong propensity of coming back”, said Andre Bakhos, managing director at Janlyn Capital LLC in Bernardsville, New Jersey.