Tags: fed | today | tomorrow | rate | hikes | economy | investors

Ignore Fed's Moves Today and Worry About What's Planned for Tomorrow

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By    |   Wednesday, 26 September 2018 11:37 AM

Fed Day and Rate Hike Expected

For the Federal Reserve it’s time to tighten. It’s time to tighten in quite a lot of places, but in particular now, it’s time to tighten in the United States.

The Federal Reserve is expected to raise rates a quarter percent at their meeting today and it would be absolutely astounding if they did not.

However, it is worth getting a sense of perspective. Even with a quarter point tightening, the ‘real’ inflation adjusted Fed funds rate is still negative using headline consumer price inflation and it’s about zero using the core consumer price inflation measure.

While markets look at consumer prices, the Federal Reserve itself may pay attention to the personal expenditure deflator as an inflation measure. "Real" rates are hardly restricted on any inflation measure.

Moreover, slashing the Federal Reserve’s balance sheet is reducing money supply, but in response to a reduction in money demand, and again, this does not seem to be an aggressive tightening process.

For markets of course, the question is not what happens to policy today. Markets have taken this onboard already. What matters is what happens to policy tomorrow.

The idea that the Federal Reserve will also raise rates in December is still very much consensus. The hike-pause, hike-pause cycle will be hard to brake. But the effects of fiscal tightening from the trade tariffs or trade taxes are a factor that adds an element of uncertainty.

The Price of Oil

President Donald Trump’s address to the United Nations General Assembly in New York yesterday was unexpectedly eventful.

In-between cracking jokes that had delegates laughing out loud, the president attacked the Organization of Petroleum Exporting Countries or OPEC for keeping the oil price high saying: “OPEC and OPEC nations, are, as usual, ripping off the rest of the world, and I don’t like it. Nobody should like it. We defend many of these nations for nothing, and then they take advantage of us by giving us high oil prices. Not good. We want them to stop raising prices, we want them to start lowering prices, and they must contribute substantially to military protection from now on. We are not going to put up with it — these horrible prices — much longer.”

A higher oil price is something that U.S. consumers are disproportionately aware of because every time they go to fill up the family fleet of sports-utility vehicles (SUVs), they are instantly reminded of the fact that they are paying more.

The recent price increase can be attributed to the U.S. policy towards Iran as U.S. sanctions will withdraw Iranian oil supply from the global market.

From a political point of view, the decision to impose sanctions on Iran in the same month of November as the U.S. midterm elections may be seen as a ‘bold’ step.

The U.S. consumer is also not likely to be too concerned by the year-on-year change in the oil prices at the pump. It is the month-on-month or the week-on-week price change that they will be sensitive to.

After all, most people cannot remember the price they were paying for petrol a year ago, but they will notice if it was higher than last week.

The oil price has remained near its 4-year high.

Now, in case oil prices don’t come down, Trump could still tap the U.S. Strategic Petroleum Reserve (SPR) and authorizes releases from the emergency stockpiles.

Please note that the White House hasn’t indicated it’s considering such a move.

Nevertheless, at the annual Asia Pacific Petroleum Conference (APPEC) in Singapore this week, which is one of the biggest gatherings of the oil-trading industry, executives openly speculated about ‘when’ Trump might tap the reserve (SPR), how many barrels could be released, and what the potential impact could be.

Of course, this is a wild card that justifies close attention for the next few weeks.

UK Prime Minster May to speak at the UN

UK Prime Minister Theresa May is to give a speech to the assembly at the United Nations in New York. Before her speech she will have a meeting with Trump whereby she will update Trump on Brexit and again petition the president over a "swift" trade deal between the UK and the U.S.

Besides all that, the UK Prime Minister has also made it clear that a general election is not in prospect, especially as at the moment the parliamentary constituencies are out of date and until they are reformed they give an electoral advantage to the opposition Labor party.

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

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For markets of course, the question is not what happens to policy today. Markets have taken this onboard already. What matters is what happens to policy tomorrow.
fed, today, tomorrow, rate, hikes, economy, investors
Wednesday, 26 September 2018 11:37 AM
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