Tags: fed | rate | hike | conditions

Fed Missing These 3 Conditions for Another Rate Hike

yellow and black interest rates rising road sign in a blue sky.
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By    |   Wednesday, 20 March 2019 09:07 AM

Financial markets are waiting to see if the Federal Reserve confirms their expectations that the Fed won’t raise its overnight benchmark interest rate, or the federal funds rate. that now stands at 2.25-2.50 percent. 

There is no expectation of any policy change today. The conditions for a Fed policy change are probably:

  • Inflation over two percent,
  • Growth over two percent and
  • Markets expecting the change.

Those conditions have not been met at the moment, but they probably could be met at some point this year.

The U.S. economy is operating around trend growth. The U.S. labor market is, if not overheating, at least very warm, and inflation in the United States is in line with long-term averages.

To run a non-neutral U.S. monetary policy in such circumstances would be just “weird” and thus the main debate is about where “neutral” now lies.

The new Federal Open Market Committee (FOMC) quarterly economic and rate projections will show how closely the Fed’s policymakers align, or not, with the expectations of the financial markets keeping in mind that the Fed’s projections in December called for two rate hikes this year.

Anyway, it will be interesting to see and hear what will “hopefully” be clarified by Fed Chair Jerome Powell during the regular press briefing.

Of course, financial markets are also interested to learn more details on the Fed’s plans of how and till when it will further reduce its holdings of Treasury bonds and mortgage-backed securities on its balance sheet.

Equity as well as currency markets are for now in a “wait and see” mode until the Fed will give its FOMC monetary policy statement, its economic rate projections and its press conference that are scheduled to start at 2:00 pm eastern time.

President Donald Trump said yesterday that the trade talks with China are going well although there are media reports that China is less optimistic on the grounds that the United States is not conceding enough.

The Australian Sydney Morning Herald reported that the apparent sticking points are the obvious ones: the enforcement mechanism for ensuring China complies with the terms of the agreement; the strength of the protections for U.S. intellectual property; reduced state subsidies for Chinese industry and, should a deal be struck, the rate at which existing U.S. tariffs on $US250 billion of China’s exports to America will be removed.

From Germany we got producer price inflation (PPI) that, on a monthly basis, fell 0.1 percent in February, after a 0.4 percent gain in January. On a yearly basis, the PPI came in at 2.6 percent in February, unchanged from January and at an 8-month low. The PPI remained unchanged for both durable consumer and capital goods at 1.6 percent, respectively, while eased slightly for intermediate goods to 1.1 percent from 1.2 percent. Meantime, costs were up for both energy (7.5 percent vs. 7.2 percent) and non-durable consumer goods (0.8 percent vs. 0.6 percent). Excluding energy, producer price inflation in February came in at 1.3 percent in February, up from 1.2 percent in January.

German PPI is a representation of the pricing power in the German economy. The German industry has been something of a drag global manufacturing in recent months. However, if companies do not show any weakening of pricing power, that’s a hint that German companies are not experiencing weakening demand and the problems of the sector should be considered to be more supply side and temporary.

Meanwhile in the United Kingdom, Prime Minister Theresa May is set to make a formal request to the European Union to make the interminably tedious EU-UK divorce process just a little bit more interminable. The question is “How long any exit delay will be?”

A really long delay could be satisfied by withdrawing Article 50 of the Treaty on European Union and then resubmitting it at a later date. A median-term or short-term delay requires consent from all the 28 member states of the European Union.

However, if the European Union tries to influence domestic UK politics by attaching conditions to a delay that may not be well received in the UK, the BBC reported.

There is really nothing intelligent to say on the subject for the moment and the best approach is probably to ignore it until something sensible happens, or, as it may be too much to hope for something sensible to happen, perhaps it is just best to ignore it until something meaningful happens.

In the meantime, the British pound remains practically unchanged at around $1.3230.

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

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The U.S. economy is operating around trend growth. The U.S. labor market is, if not overheating, at least very warm, and inflation in the United States is in line with long-term averages.
fed, rate, hike, conditions
Wednesday, 20 March 2019 09:07 AM
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