Tags: fed | rate | hike | emerging | markets

Fed's Williams: US Rate Hikes Also 'Best Solution' for Emerging Markets

Interest rate rise and bank loan rates increase as a rising lending costs or currency

Wednesday, 10 October 2018 08:50 AM Current | Bio | Archive

New York Fed President John Williams said he supports continued gradual and predictable rate hikes that should better serve global policymakers.

He said this would be “the best solution for emerging markets” to minimize unintended volatility.

The Fed’s nearly three-year-old tightening cycle has in part prompted a global shift in capital away from emerging markets, leading this year to sharp and painful currency plunges in Turkey and Argentina, in particular.

He also said that as the central bank keeps raising interest rates in a strong U.S. economy, transparency and open communications will be key to avoiding market disruptions and misunderstanding in other countries, Reuters explained.

He also expects the Fed to return to its target interest rate to normal or neutral levels within “the next year or so.”

“A key lesson about policy making in an interconnected world is that transparency and open lines of communication are critical to minimizing misunderstanding, market disruption, and volatility that can interfere with our common goals of having strong and stable economies,” he told a conference co-hosted by Bank Indonesia (BI) and the New York Fed.

“I expect price inflation to move up a bit above 2 percent. Importantly, I don’t see any signs of greater inflationary pressures on the horizon. This is all very good news, especially in the context of the slow recovery and low inflation that has persisted in the years since the financial crisis," he said in Indonesia.

"In light of the progress we’ve made on our monetary policy goals, the FOMC has been in the process of gradually normalizing monetary policy for the past few years. Looking forward, I continue to expect that further gradual increases in interest rates will best foster a sustained economic expansion and achievement of our dual mandate goals.”

Besides that, yesterday I found out that in the wake of pop megastar Taylor Swift’s Instagram post wherein she urged her 112 million Instagram followers to get out the vote, voter registrations among young Americans shot up. Vote.org says nearly 65,000 Americans ages 18 to 29 registered to vote in the roughly 24 hours after the singer-songwriter’s social media rallying cry. By noon on Tuesday, that number grew to more than 102,000.

Why does this matter so much?

It matters because the "unpredictability" of recent votes in the United States and elsewhere has been primarily because people who do not normally vote have decided to turn out and vote.

If there is an increase in voter registration in the United States ahead of the midterm elections in November, it will make the results of those elections more difficult to predict, and, in particular, it will make the predictions of opinion polls less accurate.

UN Ambassador Nikki Haley Resigns

The announcement that U.S. Ambassador to the United Nations Nikki Haley has resigned is of some market significance. The resignation may shift the bias of U.S. foreign policy, which, particularly with regard to the Middle East, is of course market relevant.

Trump said Haley told him six months ago she wanted a break after spending two years in the post. “She’s done a fantastic job and we’ve done a fantastic job together.”

Haley’s decision startled many White House officials, including Chief of Staff John Kelly and Vice President Mike Pence, officials said. Trump teased an announcement less than 15 minutes before his appearance with Haley, after news organizations began reporting she would resign.

Haley has been a strong advocate of Trump’s foreign policy. On her first day as UN ambassador she warned, “for those that don’t have our back, we’re taking names. We will make points to respond to that accordingly.”

Trump’s eldest daughter Ivanka Trump, who is a senior adviser to her father, ruled herself out of consideration in a Twitter post. He had said she would be “incredible” in the role and acknowledged he would be accused of nepotism if he nominated her.

Italy Plans to Increase the Budget Deficit Next Year

Politics in Italy continue to excite market and thus investors’ attention with the Bank of Italy giving their considered opinion that the current budget deficit proposal is a waste of money. The Italian government was meeting in emergency session last night with rising market concerns about the direction that the government is taking, which has of course sparked criticism from the European Commission that Italy is flaunting EU rules.

The 10-year yield spread over similar maturity German bunds surged toward levels last seen in April 2013. Italy’s 10-year bond yield climbed as much as 14 basis points to 3.71 percent, the highest since February 2014. The spread to German bunds widened to 314 basis points.

Now, for investors there is an important element that is not well-known. It’s a fact that ultimately, Italian debt is largely held by Italians and the European Central Bank (ECB) which makes funding the debt considerably easier than is the case for other countries.

The prospect of a default in the near term is therefore extremely low, which is of interest to euro bond investors who are disposed to take on some risk.

What very few know is that Italy is one of the wealthiest countries in the world on basis of the annually published Credit Suisse “Global Wealth Report Databook” wherein we see for example that Italy is far wealthier like someone like Germany, which gives it resources to manage its debt as long as the local population can be convinced, which still seems to be the case.

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

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New York Fed President John Williams said he supports continued gradual and predictable rate hikes that should better serve global policymakers.
fed, rate, hike, emerging, markets
Wednesday, 10 October 2018 08:50 AM
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