Tags: fed | loco | crazy | rate | hikes

Fed Would Be Crazy If It Didn't Hike Rates in Strong Economy

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Thursday, 15 November 2018 10:30 AM Current | Bio | Archive

Powell’s Personal Views: Where We Are and Where Are Going

Federal Reserve Chairman Jerome Powell said in a question-and-answer session yesterday with Dallas Fed President Robert Kaplan that the Fed was closely monitoring a modest deceleration in global growth.

“You’ve seen a bit of a slowdown—not a terrible slowdown. You still see solid growth, but you see growing signs of a bit of a slowdown. And it is concerning,” Powell said.

That said, he also made it clear, at least in my view, that we’ll have the expected Fed rate hike in December.

In fact, under today’s U.S. economic circumstances, the Fed would be “loco” not to be raising rates with the “real” cost of borrowing as low as it is and the U.S. economy as strong as it is.

Powell did acknowledge some risks to the U.S. economy ahead, but this was in the context of strong U.S. growth.

“I’m very happy about the state of the economy now. Our policy is part of the reason why our economy is in such a good place right now,” he said. He added the risk is out there that U.S. economic growth could slow in coming years as recent fiscal stimulus from tax cuts and spending increases wear off, which is in fact nothing else than pure logic.

Interestingly, Powell also said: “The U.S. economy is just really strong, and it is stronger than many other major economies right now,” and because of that it’s putting strains on some emerging-market economies that face headwinds from a stronger dollar.

Powell also said that the U.S. economy could sustain a higher growth rate, which could potentially allow for faster growth without a large increase in inflation.

Powell made it also clear that the recent stock-market volatility would not affect the Fed’s interest-rate decisions.

He concluded that the Fed would evaluate “really carefully how the markets and the economy and business contacts are reacting to our policy,” or, said in clear language, the Fed will closely watch at what pace and for how long the Fed’s rate hike path should remain in place without causing damage to the overall U.S. economy.

As ever with Powell, he didn’t give “particular” economic inside views. 

All this shouldn’t surprise the financial markets.

The Draft Brexit Deal Faces Hurdles

In the interminably tedious process of separating the European Union (EU) from the United Kingdom (UK), Prime Minister May declared yesterday that the British Cabinet had backed the draft Brexit deal after an “impassionate” debate.

Herein lies one of the key problems in this whole “mess.” The Cabinet was “passionate,” but in the real world, people are bored with this and just want it to go away.

The risks that the draft Brexit deal fails to get through Parliament are fairly considerable.

The opposition Labor Party already had said they would consider a response after studying the document in detail. Everyone knows that they are not going to vote in favor.

In the meantime, UK Prime Minister Theresa May got already to endure a couple of serious blows this morning.

Her Brexit minister resigned this morning and published his resignation letter on Twitter stating: “Today, I have resigned as Brexit Secretary. I cannot in good conscience support the terms proposed for our deal with the EU…”

Besides that, Northern Ireland Minister Shailesh Vara had already resigned earlier over the draft Brexit deal stating that in his words this leaves the U.K. in a half-way house with no time limit on when we will finally be a sovereign state.

All this doesn't bode well and in the end it all will come down to how many “rebels” will there be on each side. Developments in Parliament will be critical, and ultimately the value of the Brexit divorce agreement hinges on whether May can persuade a majority of MPs to support it in a parliamentary vote."

If ratified, the agreement would open the path to the so-called 'transition period' between April 2019 and the end of 2020.

Investors could do well also keeping in mind that if it comes to an agreement it still will have to be accepted by both the UK and EU parliaments and by the 19 EU leaders.

The British pound (GBP) recently traded down around 1.0 percent at around $1.28.

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

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Under today’s U.S. economic circumstances, the Fed would be “loco” not to be raising rates with the “real” cost of borrowing as low as it is and the U.S. economy as strong as it is.
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Thursday, 15 November 2018 10:30 AM
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