Thursday, August 21, 2014

Fed softening world up for rate rise in early 2015

Throughout the year, the US Federal Reserve has been softening up for the world for what - at the moment at least - appears to be inevitable.

Once the US economy is on a firmer footing, inflation starts rising and the labour market has sufficiently strengthened - interest rates will need to move from their current emergency level of between zero and 0.25 percent.

But the big question has been one of "when".

The minutes from the Fed's July meeting released early this morning Australia time stoked anticipation about what will almost certainty be a dramatic event for global financial markets.

"Many participants noted that if convergence toward the committee's objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated". 

The unusually direct and optimistic tone from the Fed - almost six years after the Wall Street collapse - was fresh fodder for pundits who are now talking about a small rate hike early next year.

The changed language comes as the Fed's massive quantitative easing program is set to evaporate in October, having been reduced by a steady US$10 billion per month since late last year.

This time last year, the money printing program was pumping out US$85 billion per month as speculation began to build that an improving labour market meant the party of cheap and easy money was about to end.

Today's measured signal is not to say the messages from the Fed have always run to plan.

Back in March, in her first major appearance as the world's most powerful central banker, Federal Reserve chair Janet Yellen perhaps accidentally triggered the softening up strategy she told reporters that the first rate rise could be six months after the money printing ends. 

REPORTER: Could you tell us how long of a gap we might expect before the rate hikes do begin?

JANET YELLEN: You know, probably means something on the order of around six months or that type of thing but you know, it depends, what the statement is saying is it depends what conditions are like. 


Those surprisingly frank comments from Dr Yellen sparked a small fall on Wall Street as the prospect of an eventual rate rise began to take on some distant reality.

This morning's reaction was more subdued as investors focused on what they saw as positives - that the Fed will continue to support America's still-recovering economy for as long as needed and that any rate movement will be gradual.

While the US jobless rate is down from global financial crisis highs to 6.2 percent, there's growing scrutiny on hidden unemployment and whether the quality of jobs on offer amount to what America once regarded as a living wage.

1 comment:

  1. The problem is that someone is controlling the rates artificially. Let's move beyond usury.

    ReplyDelete

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