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December Rate Hike Will Have Ripple Effect on Global Economy

December Rate Hike Will Have Ripple Effect on Global Economy
(Dollar Photo Club)

By    |   Friday, 06 November 2015 07:23 AM

Next month could be very interesting for investors and markets around the world if both the Federal Reserve and ECB swing into action.

Speaking on Thursday at a Joint Central Bank Conference in Bern, Switzerland, Atlanta Fed President Dennis Lockhart, who is known for his centrist opinion on Fed rate hikes,
made some interesting remarks:
  • "It’s my assessment that the U.S. economy is likely in an above-potential growth phase, with labor markets continuing to improve, and with an underlying inflationary trend that, if not rapidly moving toward the FOMC’s objective, is at least not moving away from that objective …
  • "It’s my opinion that most, though not all, labor market slack has been absorbed …
  • "Our estimate of investors’ underlying CPI inflation expectations over the next five years is about 2.1 percent, right in line with the FOMC’s objective. Overall, it appears to me that inflation expectations are fairly well anchored …
  • "Liftoff will soon be appropriate … we are in the midst of transition from an extraordinary period that called for unconventional tools, to a period where we again utilize rule-like benchmarks."
St. Louis Fed President James Bullard told Reuters that “a likely slowdown in job growth will be interpreted as a downturn in the broader economy that will cause the Fed to hold off again":

“Everyone has in their head 200,000 ... The natural expectation is for the pace of job growth to slow in the months and quarters ahead. We are expecting that to happen. It would be normal, and that would not indicate poor macroeconomic performance.”

Bullard was clearly concerned about markets misinterpreting a natural evolution in job growth and therefore he referred to a 2014 Fed study that states: “… growth in the labor force slows, the “break-even” level of monthly job gains required to hold the unemployment rate unchanged month-to-month will be lower than decades past. By our calculations, over the next decade somewhere between 50,000 and 75,000 jobs per month will be needed to maintain an unchanged unemployment rate, well less than the amount needed in the 1990s.”

Anyway, we’ll have to wait until December 16 to know what the FOMC will decide and what Fed Chair Janet Yellen will tell us during her press conference.

Meanwhile, the Chicago Mercantile Exchange (CME) FedWatch showed a 58.1 percent probability of a 0.50 percent rate hike on December 16.

The yield on the 2-year U.S. Treasury reached 0.85 percent, which was its highest level since April of 2011 and indicates the higher probability for a rate hike on December 16.

A Fed rate hike in December will have a range of impacts on the broad markets everywhere.

Also the dollar should strengthen further, ECB President Mario Draghi said in an interview with Italy’s financial daily Il Sole 24 Ore: “If we are convinced that our medium-term inflation target (close to, but below, 2 percent and at present at 0.0 percent) is at risk, we will take the necessary actions … We expect inflation to remain close to zero, and maybe even to turn negative, at least until the start of 2016 … The interest rate on deposits (at present at negative -0.2 percent) could be one of the instruments that we use again.” 

Further easing/stimuli by the ECB are fully in the cards.

So in case the ECB “stimulates” on December 3, which by itself would be enough to further strengthen the dollar, and then on December 16 the Fed raises interest rates, we’ll see a new wave of “dollar up/euro down.”

For all investors this will be important as a stronger dollar will impact a whole variety of commodity prices like for example oil.

Many investors could do well keeping in mind that since the summer of 2008 when the euro and oil reached their peaks “together,” both have started moving down more or less together.

As always, “past performances are no guarantee of future results.”

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A Fed rate hike in December will have a range of impacts on the broad markets everywhere.
investor, fed, economy, jobs
Friday, 06 November 2015 07:23 AM
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