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Don't Rule Out Fed Rate Hike Later This Year

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By    |   Thursday, 21 February 2019 10:12 AM

The minutes of the Federal Reserve's latest monetary policy meeting didn't contain the sort of specifics needed to get financial markets really enthusiastic.

There was some nice discussion about balance-sheet reduction and why this really shouldn’t be a very big deal for financial markets. There were hints that the balance-sheet reduction would end this year, although the balance sheet would then still shrink as a share of GDP at that point. 

Of perhaps some interest was the fact that there were clear disagreements between different factions at the FOMC about the nature and the timing of further monetary-policy timing. The rather astonishing unanimity of view we have seen earlier in the year has now given way to the normal “hawks” versus “doves” discussions.

The Fed did also highlight international economic concerns in Europe and elsewhere as a reason for caution, but these concerns should fade later this year.

An excerpt of the minutes that could also be of interest to investors reads: “Risks to the inflation projection also were seen as balanced. The upside risk that inflation could increase more than expected in an economy that was projected to move further above its potential was counterbalanced by the downside risk that longer-term inflation expectations may be lower than was assumed in the staff forecast, as well as the possibility that the dollar could appreciate if foreign economic conditions deteriorated.”

That said, and all in all, there was something for everyone and certainly nothing to go against the idea of a rate hike later this year.

Regarding the U.S.-China trade negotiations, Reuters reports that negotiators are drawing up six memorandums of understanding (MOUs) on structural issues: forced technology transfer and cyber theft, intellectual property rights, services, currency, agriculture and non-tariff barriers to trade, as a broad outline of what could make up a deal.

Nevertheless, one source cautioned that the talks could still end in failure, but the work on the MOUs was a significant step in getting China to sign up both to broad principles and to specific commitments on key issues.

The Chinese Commerce Ministry spokesman Gao Feng declined to comment on the MOUs.

Besides that, Geng Shuang, a spokesman of the Chinese Ministry of Foreign Affairs said at a routine press briefing that China will not use its currency, the yuan’s (CNY) exchange rate as a bargaining chip to resolve trade disputes with the United States. Geng’s comments follow reports that the U.S. is pressing China to keep the yuan (CNY) stable as part of an agreement intended to end the U.S.-China trade war, the China daily Ciaxin reported.

Turning to the U.S., from the Census Bureau we got the advance report on new orders for U.S. manufactured durable goods that rose 1.2 percent from a month earlier in December 2018, following an upwardly revised 1 percent advance in November and missing market expectations of a 1.5 percent gain. Excluding transportation, new orders increased 0.1 percent. Excluding defense, new orders increased 1.8 percent. Transportation equipment was up 4 of the last 5 months, led the increase.

It is a bit soon to be looking for firm signs of better investment ahead, but if it does come through it could be magnified by the trade effect and create a double positive or at least a double force for stabilization in the global economy.

From the Euro area we got the IHS Markit Flash Eurozone PMI, which informed that Eurozone growth remained muted in February amid a decline in manufacturing. Chris Williamson, Chief Business Economist at IHS Markit commented: The Eurozone economy remained close to stagnation in February. The survey data suggest that Eurozone GDP may struggle to rise by much more than 0.1 percent in the first quarter. Germany is on course to grow by 0.2 percent while France looks set to stagnate or even contract very slightly. The rest of the Eurozone meanwhile is suffering its worst spell since late 2013, with growth having slipped closer to stalling in February. Price pressures have meanwhile continued to ease alongside the more subdued demand environment.

All this is important for investors as it more and more starts to look like the European Central Bank could ease gain, in one way or another, which would of course be a negative for the euro.

For now, the euro remains around the $1.13 per euro handle.

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

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There was something for everyone in the Fed minutes and certainly nothing to go against the idea of a rate hike later this year.
fed, rate, hike, investors
Thursday, 21 February 2019 10:12 AM
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