Tags: inflation | fed | rate | hike

Weak Inflation Won't Prevent Fed From Hiking Rates Again

Weak Inflation Won't Prevent Fed From Hiking Rates Again

By    |   Monday, 18 September 2017 08:34 AM

The Federal Reserve Open Market committee (FOMC) meeting looms over the financial markets and is likely the main focus of attention especially after the Consumer Price Index (CPI) increased to 1.9 percent year-on-year (y/y) on Thursday (+0.4 percent m/m), which was its strongest performance since January.

Also, services prices surged 2.5 percent y/y and +0.4 percent m/m following three months of a 0.2 percent gain.

It’s a fact that persistent lower-than-target inflation did provoke concerns among some of the “dovish” members Federal Reserve FOMC members arguing that inflation expectations might be moving lower, and therefore warranting a slower pace of rate increases.

Now, it seems becoming clear that inflation is coming back and therefore it makes sense, at least to me, that the Fed is on its way to raise rates in December.

One should not overlook the fact that headline inflation doesn’t have to be at the Fed’s 2 percent target for the central bank to hike. Let’s not forget that weak inflation didn’t deter the Fed from raising rates in June.

As of Friday, the probability of a December hike and as calculated today was up to 47.2 percent, up from around 31 percent only a week ago.

Important for investors is the fact that the two-year yields have risen by 7 basis points since last Monday to 1.39 percent.

Over the next 6 months, I personally expect the two-year Treasuries’ yields to increase from that 1.39 percent to around 1.8 percent, which, in case I’m right, would of course also mean that their price is set to go down. This is of course not written in stone.

Besides all that, the expectation now is that this month will herald the start of a passive quantitative tightening is important, especially as the tightening program is expected to be set out for several years ahead.

Investors may also choose to monitor how isolationist the United States is becoming with President Trump attending assorted United Nations’ meetings over the next couple of days.

The U.S. Secretary of State has indicated that the United States may not in fact pull out of the Paris Climate Change accord.

President Donald Trump has denied any U-turn, but for investors this could be important because any U-turn would have investment implications.

There are a number of heads of governments’ meetings scheduled, including a meeting between President Trump and UK Prime Minster May who called President Trump’s recent tweets, quote, “unhelpful.”

Trump tweeted: “Another attack in London by a loser terrorist. These are sick and demented people who were in the sights of Scotland Yard. Must be proactive!

Criticizing the Trump twitter feed is a serious thing.

Today, the Governor of the Bank of England (BoE) Mark Carney is scheduled to give a speech at the Camdessus Central Banking Lecture 2017 in Washington, D.C., which is of interest, given the language and signals coming from the Bank of late that have been somewhat hawkish. The UK has a growth rate that almost certainly will be revised higher as full employment and inflation are about target.

The political uncertainty that is surrounding the exit from the European Union (EU) is a risk with, over the weekend, the UK foreign secretary Boris Johnson adding to that uncertainty by painting a positive picture of what he called a “glorious” post-Brexit Britain, and rejecting the notion of paying for access to the single European market.

But were policy to be determined on economic fundamental grounds alone, it would be difficult to justify the current policy stance.

The hawkish rhetoric is likely to be continued.

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

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As of Friday, the probability of a December hike and as calculated today was up to 47.2 percent, up from around 31 percent only a week ago.
inflation, fed, rate, hike
Monday, 18 September 2017 08:34 AM
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