The Sky Did Not Fall
Asia extended the US dollar’s post-Fed gains while Europe has seemed content to consolidate the move, perhaps waiting for US leadership.
Category: Monetary Policy
A Dovish Interest Rate Hike?
For the first time in 9 years, the Federal Reserve has raised interest rates in a move that could make many loans more expensive for companies and Americans. Speaking today in Washington D.C., Federal Reserve Janet Yellen discussed the Federal Open Market Committee’s decision to raise its Federal funds rate target 25 basis points, making a new target range of 0.25 to 0.5%.
The Greenspan Conundrum
There are many investors and observers who do not think the Fed ought to raise interest rates today. The Fed’s targeted inflation measure, the core PCE deflator, stood at 1.3%, well below the 2% target.
They see the fresh sell-off in oil prices and are more concerned disinflation than inflation. Over the past week or so, more concern has been expressed about the sell-off in the high yield bond market.
Fed Day: Not Tight, Just Less Easy
The much-awaited Fed meeting is here. A 25 bp increase in the Fed funds range to 25-50 bp is widely expected. The near certainty of this contrasts to the high uncertainty of the immediate impact stocks, bonds, and the dollar. There are five components of the Fed’s decision that will command attention.
Consequences of Setting Such a Low Interest Rate Bar
With the US Federal Reserve seemingly set on raising interest rates, it is time to take stock of what low rates have done for the world. In addition, what the prospects are when this era of low interest rates ends.
Since the financial crisis, short-term interest rates have been close to zero in most major economies. The US Federal Reserve has held interests around 0.25% for the last seven years. Meanwhile, the UK’s bank rate remains at 0.5% and in Sweden the central bank has set a negative nominal rate.
The Fed Meets, but So Do Other Central Banks
The euro made marginal news highs near $1.1060 while sterling and the yen have been confined to yesterday’s ranges. European equities are bouncing off ten-week lows. The dollar-bloc is firm; the upbeat RBA meetings provided only a short-lived fillip higher. Oil prices are steady to firmer after yesterday’s recovery.
From the Mind of Mersch
Investors, fellow central bankers, and the media continue to try to make sense of last week’s ECB surprise. We had argued that given the market positioning, especially the dramatic accumulation of speculative short euro positions since the middle of October that the market was prone to a correction.
Do Diverging Monetary Policies Matter?
The prospect that the central banks of the US and the Eurozone will soon make opposing moves on policy rates has allowed financial markets once again to demonstrate their neuroses. Some market participants are expecting exchange rate turmoil – but while this may always make good copy, it does not always follow from good analysis.
ECB Over-promises and Under-delivers; Moving on to the Fed
The only way to explain the largest swing in the euro in six years yesterday is to appreciate the disconnect between what was expected and what was delivered by the ECB. Draghi’s urgency and commitment to do “what it must” fanned expectations, and more importantly, substantial positions, in various asset classes–short euros, long European debt, and equities. The washout was dramatic.
The ECB Disappoints
Market participants knew that volatility would rise today with the ECB meeting. What they got was far worse than could have been anticipated.
