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Fed Expected to Hike Rates 5 Times by End of 2017

Fed Expected to Hike Rates 5 Times by End of 2017
(Dollar Photo Club)

Wednesday, 18 May 2016 07:20 AM Current | Bio | Archive

Today, there is the excitement of the U.S. Federal Reserve revealing the minutes of its last meeting.

Normally, the minutes attract a certain stir of interest, but that may well be heightened this time around by the seemingly coordinated way image members of the FOMC have been talking about the prospect of raising rates sooner rather than later. That does not mean that the minutes themselves will tip the balance as far as the market is concerned, that would probably take a comment from Fed Chair Janet Yellen, but it might move markets closer to the position of most economists, namely that U.S. inflation, employment and growth argue for a rate increase.

By the way, Yellen going to speak on June 6 at the World Affairs Council in Philadelphia, which is precisely 9 days ahead of FOMC meeting and just before the blackout period.

Meanwhile in Japan, the consumer made it apparently out of the house to spend some money as the Q1 GDP was stronger than expected on stronger than expected consumer spending. On an annualized basis, GDP was 1.7 percent although that annualizing data does tend to produce wild exaggerations of what is actually happening in the economy and needs to be looked at with considerable caution as a general rule. Japan’s 2015 Q4 GDP was revised down to -1.7 percent from -1.1 percent.

One point worth noting is that the nominal GDP was in line with expectations. The real GDP improvement came because prices were lower than had been expected.

Nominal GDP is the more relevant metric to consider when thinking about Japan's debt burdens as it has the highest public debt burden in the world.

The just released final Euro area CPI came in at -0.2 percent on a yearly basis (y/y) while the core inflation rate also edged down by 0.2 percent and came in at +0.7 percent (y/y), which is of course far below the ECB's 2 percent target and where it is now since the start of 2013.

It will be interesting to see how the ECB will react to these data at its next Governing Council Monetary Policy meeting on June 2.

The negative CPI of the Euro area is obviously in significant contrast with the solid pickup in U.S. consumer price inflation (CPI) that now stands at +1.1 percent y/y and the CPI less food and energy (Core CPI) now stands at +2.1 percent.

Of course, the CPI is not the Fed’s favored inflation measure, but it is the measure that matters most to the financial markets.

In the fixed income markets this is because the CPI is the measure for the index-linked securities that are linked to it and because about 70 percent of U.S. government spending and all Federal government tax brackets are also tied to the CPI.

CPI is less relevant for equities because the producer price inflation (PPI) is normally considered to be a better reflection of corporate pricing power.

Although there was a small moderation of -0.1 percent in yesterday’s core CPI, most measures of CPI are currently running above their average rates and that’s a pretty good indication for the long-term trend for inflation.

This is most certainly not a generally disinflationary environment in the U.S.

Headline inflation should pick up as oil price base effects fade. Though this is one measure that remains below its long-term average, for now, and there is also a relative price shift in the detail with the price of services outstripping the price of manufactured products.

The Fed’s actual monetary policy, as accommodative as they are currently doing, is certainly not consistent with the overall U.S. inflation environment.

The big and extremely important question remains when, not if, will the Fed change its funds rate, because that will impact, without any doubt, a whole range of markets all over the globe.

Anyway, the people at Goldman Sachs expect U.S. inflation to continue rising and consider at present the dollar as undervalued because, in part at least, they expect two Fed rate hikes this year and three more hikes in in 2017 while Japan and Europe will have no other choice than to continue their easing policies.

I must say, I fully agree.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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Of course, the CPI is not the Fed’s favored inflation measure, but it is the measure that matters most to the financial markets.
fed, hike, rates, yellen
Wednesday, 18 May 2016 07:20 AM
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