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Fed Ignorance of Roaring Inflation Is Big Investor Risk

Fed Ignorance of Roaring Inflation Is Big Investor Risk
(Maksym Yemelyanov/Dreamstime)

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Thursday, 14 June 2018 12:16 PM Current | Bio | Archive

Federal Reserve

The Federal Reserve raised the fed-funds rates by a quarter of a point.

The so-called dots plot caught a little bit of attention. There was a signal that all was well with the U.S. economy. This is probably because all is well with the U.S. economy.

The soft patch was largely a media invention as the labor market continues to hum along. Attempts to raise taxes (tariffs) on U.S. consumers have largely been invisible so far, though that does remain a future risk.

The Fed policy meeting was, in short, entirely consistent with the idea of a total of four rate hikes this year. The outlook for 2019 remains sufficiently far off that financial markets are probably not going to worry too much about it.

The Federal Reserve doesn’t think inflation is going to be out of control. The central bank doesn't especially want to lower inflation and wants to maintain things pretty much as they are today.

This is consistent with a “risk-on” investment story. The Fed is not trying to undermine corporate pricing power, but a little bit more market volatility looms.

The currency markets wobbled a little a little and then went back to pushing down the dollar a little. 

Emerging Markets

After the Fed raised interest rates and upgraded its forecast to four rate hikes this year, stocks and currencies in emerging markets extended losses. Equities halted a two-day rally, while a measure of currencies breached a key technical level, which is seen as a harbinger for more losses to come. Of course, we will have to wait and see what happens further down the road.

The Argentine peso fell 2 percent and ended the yesterday’s session at 26.26 pesos per dollar, a record low. The Argentine peso is down 29 percent this year, which makes it the worst performing currency in the emerging markets.

Argentine’s 100-year government bond due in 2117 also fell, with the yield up by 7 basis points to a record 8.6 percent.

The steep fall of the peso was caused after the central bank announced it would sell $7.5 billion from the $50 billion credit line it was promised by the IMF in order to support the foreign exchange market and help stabilize the peso and support its budget.

The IMF’s executive board will vote on the credit line on June 20. The IMF said Argentina requested 30 percent of the $50 billion credit line, or $15 billion to be disbursed upon approval and half of that be made available for budget support.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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HansParisis
The overall story is of a Federal Reserve that doesn’t think inflation is going to be out of control and which does not especially want to lower inflation, but which does want to maintain things pretty much as they are today.
fed, investors, emerging, markets
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2018-16-14
Thursday, 14 June 2018 12:16 PM
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