Wednesday, 26 September, 2018

Fed expects economic gains to prompt gradual rate hikes

Fed expects economic gains to prompt gradual rate hikes Fed expects economic gains to prompt gradual rate hikes
Nellie Chapman | 24 February, 2018, 06:43

The report was released before new Fed chair Jerome Powell's first Congress testimony which was scheduled on February 27.

Williams, who votes on monetary policy this year and has been interviewed by the White House for the post of Fed vice chairman, painted an upbeat picture of a US economy, echoing recent remarks from other USA central bankers.

"You could make the argument that the Fed minutes were dovish as they didn't foretell four hikes like many expected", said Glen Capelo, head of rates at Academy Securities. The term is a reference to the hedging strategy of using a put option to guarantee an investor a sale at a preset price to limit losses.

Stocks have been gyrating this month amid fears of rising inflation and the rising interest rates that generally follow.

Since the January meeting U.S. stocks have been volatile, although Fed officials have played down the impact of a recent sell-off given how high the stock market has risen.

"There was definitely a Yellen put, and it remains to be seen whether there will be a Powell put", said Hooper.

The futures markets for short-term interest rates echoes that, showing a strong expectation of three increases in the fed funds rate this year, and about a 30% chance for a fourth.

According to the minutes for Fed's policy meeting on January 30 and 31, Fed officials have become more confident about the growth and inflation outlook, paving way for gradual interest rate hikes in the future.

"I anticipate further gradual increases in the policy rate will be appropriate to both sustain a healthy labor market and stabilize inflation around our 2 percent objective", Fed Governor Randal Quarles said in remarks prepared for delivery to the Institute for International Monetary Affairs in Tokyo.

"The economic expansion continues to be supported by steady job gains, rising household wealth, favorable consumer sentiment, strong economic growth overseas, and accommodative financial conditions", said the report. "A five-year CD gets you 3%", he said. A "hawkish" monetary policymaker is more aggressive in warding off inflation. Higher rates could also tighten credit for consumers as well as companies that have struggled to grow their sales as quickly as their profits during this economic recovery.

With little economic data due on the last trading day of the week, investors will be keeping an eye on the central banking space and moves in the bond market. The argue that an economy that is overheating would require potentially destabilizing interest rate hikes later. But so far this week, it's a good return to form for the greenback.

Striking the right balance is not always easy though.

The pace of inflation has already begun to dominate Powell's first month in charge. When Mr. Bernanke made the plan public, it triggered the so-called "taper tantrum" sell-off in the bond market in the summer of 2013.

The Fed raised rates three times previous year with the last hike occurring in December.

One of the Federal Reserve's newest policymakers on Thursday added his voice to the majority at the US central bank calling for interest rate hikes amid rising business optimism and faster growth in the world's biggest economy.

Overnight index swaps, contracts used to wager on the trajectory of the US central bank's target rate, are not fully pricing in three hikes at the moment, although two are seen as a near certainty by the market.