The US dollar jumped yesterday after the Federal Reserve released the statement from the Open Market Commission (FOMC). The Fed raised interest rates and committed to continue the tightening process. It raised interest rates by a quarter a percentage point from 2 to two and a quarter per cent. This was the third rate hike this year and the eighth in the tightening cycle that started in 2015.
In the statement, the committee said that the economy remained strong with falling unemployment rate, record low jobless claims, and inflation that has been contained slightly under the two per cent. On these issues, the statement said that:
Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.
The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.
After the news, the dollar index jumped as shown below.
This statement increased the possibility that the Fed will raise interest rates in December. The forecast also points to three more rate hikes in 2019 and one in 2020.
Amidst all these, the Fed could be setting itself for failure for a number of reasons. First, in recent months, the gap between the ten-year yield and the two-year treasury yield shows that an inversion is around the corner. A December hike could possibly lead to this inversion. Every time the yield curve inverts, it leads to a recession. This leads to the question on why the Fed would continue to hike knowing well that an inversion could happen?
Second, why is the Fed in a hurry to hike rates? Already, the US has the highest rates among the developed countries. The EU and Japan have record low rates and they are not in a hurry to hike. The UK’s rates are low and the BOE has promised to wait and see first the progress on Brexit. New Zealand and Australian central banks too have pointed to a low for longer policy. Therefore, why is the Fed in a hurry to hike?
Third, the US is now embroiled in a trade war. In the statement, the officials said that the projections on the impacts of the trade war shows that it will not have major impact on the economy. Shouldn’t the Fed pause and wait for indications on a trade war?
Today, the US will release the final reading of the second quarter GDP. Traders expect the number to show that the GDP rose by 4.2% in the quarter. Traders are now focused on the third quarter data. They expect the economy to grow by about 3% in the quarter.
The US dollar jumped yesterday after the Federal Reserve released the statement from the Open Market Commission (FOMC). The Fed raised interest rates and committed to continue the tightening process. It raised interest rates by a quarter a percentage point from 2 to two and a quarter per cent. This was the third rate hike this year and the eighth in the tightening cycle that started in 2015.
In the statement, the committee said that the economy remained strong with falling unemployment rate, record low jobless claims, and inflation that has been contained slightly under the two per cent. On these issues, the statement said that:
Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.
The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.
After the news, the dollar index jumped as shown below.
This statement increased the possibility that the Fed will raise interest rates in December. The forecast also points to three more rate hikes in 2019 and one in 2020.
Amidst all these, the Fed could be setting itself for failure for a number of reasons. First, in recent months, the gap between the ten-year yield and the two-year treasury yield shows that an inversion is around the corner. A December hike could possibly lead to this inversion. Every time the yield curve inverts, it leads to a recession. This leads to the question on why the Fed would continue to hike knowing well that an inversion could happen?
Second, why is the Fed in a hurry to hike rates? Already, the US has the highest rates among the developed countries. The EU and Japan have record low rates and they are not in a hurry to hike. The UK’s rates are low and the BOE has promised to wait and see first the progress on Brexit. New Zealand and Australian central banks too have pointed to a low for longer policy. Therefore, why is the Fed in a hurry to hike?
Third, the US is now embroiled in a trade war. In the statement, the officials said that the projections on the impacts of the trade war shows that it will not have major impact on the economy. Shouldn’t the Fed pause and wait for indications on a trade war?
Today, the US will release the final reading of the second quarter GDP. Traders expect the number to show that the GDP rose by 4.2% in the quarter. Traders are now focused on the third quarter data. They expect the economy to grow by about 3% in the quarter.
The post Why is the Fed in a Hurry to hike Rates? appeared first on Forex.Info.
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