The Federal Reserve ventures closer to raising interest rates in a move that could impact the cost of mortgages, car loans, corporate bonds, and a variety of other debts throughout the financial world. According to the Federal Reserve, “economic activity increased at a modest pace in most regions of the country” from October to November, indicating that the Fed sees enough data points to justify raising interest rates.
The much-anticipated ECB meeting is at hand. Yesterday’s disappointing Eurozone CPI figures only fanned the anticipation. Today the service PMI was softer than expected at 54.2, down from 54.6.
What will Draghi do? There are four moving parts.
On Monday, the Federal Reserve met to discuss the discount rate. There has been a steady increase in the number of regional Federal Reserve presidents requesting an increase in the discount rate. The minutes of the October 26 meeting were reported yesterday.
The divergence of monetary policy is discounted, they argued. Ahead of next week’s big events, which include the IMF’s SDR decision, the ECB meeting, OPEC meeting, and the US jobs data, the euro, against which speculators have amassed a large short position, just shy of a record, were supposed to be content.
With the vast majority of economists and primary dealers expecting the Federal Reserve to lift rates next month, the subject of discussion has shifted toward the pace of the hikes and the peak or terminal rate.
The dollar-bloc currencies and the Norwegian krone were the strongest major currencies last week but are leading the downside today. The slump in commodity prices is taking a toll. WTI is off by nearly 3%. Copper is off about half as much, and gold is off about half as much as copper. More broadly, the US dollar is firm across the board.
The Federal Reserve holds a discount rate meeting on Monday. There is some speculation that the 75 bp discount rate could rise. At the September meeting, which is not the same at the FOMC meeting five of the 12 regional Federal Reserve banks voted into favor a raising the discount rate. One favored cutting it.
The economic data has generally strengthened since then. The FOMC statement last month and the subsequent official comments have indicated that most officials appear on board with a December rate hike, barring a shock.
The US dollar is rebounding today after yesterday’s correction. Those losses seemed to have been a function of some profit taking after the seeming confirmation in the FOMC minutes that the Fed was set, barring a significant surprise, to raise rates next month. The dollar bulls were already beginning to buy the dip before Draghi spoke.
The British historian Lord Acton famously said, “power corrupts and absolute power corrupts absolutely.” The American response is a system of checks and balances. The Federal Reserve represents a concentration of power that became abundantly clear during and after the Great Financial Crisis.
December will be a month to remember. ECB President Draghi continued to fan expectations of further accommodative measures at the December 3 meeting. At the same time, the strength of last week’s US employment report, reinforced by comments from the Fed’s leadership, has convinced many that lift-off is likely a fortnight after the ECB meeting. Following the jobs data, a Reuters, poll found 15 of 17 primary dealers expect the Fed to hike rates next month.
