Asia Reacts Positively to Fed Interest Rate Hike

23 Dec 2015 | Author: | No comments yet »

Fed’s Williams wants low rates, hot economy in 2016.

At least for the short run, the Federal Reserve’s interest rate increase has created one clear winner: the banks. The Federal Reserve aims to keep the U.S. economy running hot next year to boost the job market and inflation, a top central banker said, and to achieve that goal interest-rate hikes will be slow but will not follow any predictable pattern. “Every meeting will truly be live in terms of adjusting policy one way or the other,” San Francisco Federal Reserve Bank President John Williams told Reuters in an interview, referring to the Fed’s policy-setting meetings.February gold GCG6, +1.52% gained $15.40, or 1.5%, to settle at $1,065 an ounce on Comex, a day after sinking to its lowest settlement since 2009 Thursday. When the Fed announced on Wednesday that it would raise its benchmark rate to a range of 0.25 to 0.5 percent, banks raised the rates they charge on many loans but not the rates they pay to depositors. Fed officials on Wednesday unanimously backed an increase to the central bank’s benchmark interest rate target, lifting rates from near zero for the first time since the financial crisis.

But the yellow metal saw a weekly drop of 1%, its eighth weekly decline in the last nine. “We still maintain our long term view is bullish for the yellow metal because there [are] just so many events which can derail the global growth and volatility could pick up immensely,” said Naeem Aslam, chief market analyst at AvaTrade. The Fed’s reasoning was straightforward: If the economy grows too quickly, we could see the kinds of inflation and stock market bubbles that could endanger the entire economy. Also, “we have the longest bull rally for equities since the World War II, and this itself is another reason to play safe and what else could be a better option than holding the yellow metal.” “Gold remains heavily bearish and bears have been gifted an opportunity to install another round of selling momentum throughout metals before the end of the year. The unemployment rate has held steady recently, at 5 percent, but the underemployment rate — which includes the unemployed, part-timers who need full-time work and jobless workers who have apparently given up looking — is still at nearly 10 percent. Many economists have latched on to March as the most probable, in part because that would coincide with Fed Chair Janet Yellen’s next scheduled press conference.

With any hopes of a recovery in prices discounted, further dollar appreciation should send this zero yielding metal back towards $1,046 [an ounce] and potentially lower,” said Lukman Otunuga, research analyst at FXTM in a Friday research note. It’s also, in that regards, a sign of confidence: After a slow and painful recovery, the Fed believes the economy is now strong enough to justify higher interest rates. Critics dispute this. “When the Fed sets out to slow inflation by raising interest rates, what it’s literally doing is squeezing the supply of credit to slow down job and wage growth,” explains Jeff Spross for the Week magazine. With no evidence of inflation in wages or in consumer prices, there was simply no need at this time for the Fed to risk slowing the economy by raising rates.

Williams – who worked for Yellen when she ran the San Francisco Fed before handing the reins to him, and whose views are seen to align closely with hers – said his own view is in line with that expectation. For most of the past several decades, Fed policy makers tended to indulge these fears by giving priority to fighting inflation, even when doing so stifled jobs and wages. Higher rates strengthen the attractiveness of the dollar, boosting the return of deposits in that currency, while making dollar-based assets more expensive to investors using other monetary units.

Yellen, in her news conference immediately following Wednesday’s decision, also emphasized that rate hikes, though gradual, would not necessarily be all a quarter of a percentage point or evenly spaced in the calendar year. A slack labor market—especially in the absence of unions or other mediating institutions—means less leverage for higher pay and less job security, more so for low and mid-wage workers. January platinum PLF6, +1.73% added $16.10, or 1.9%, to end at $860.80 an ounce, with a 2% weekly gain, while March palladium PAH6, +0.00% tacked on $1.50, or 0.3%, to $558.95 an ounce, scoring a 2.6% weekly climb. Which is all to say that the Fed’s hike could presage another year of steady growth, or a downturn as a still-fragile economy reacts to slightly tighter credit and slightly less liquidity.

Recent comments by Janet Yellen, the chairwoman of the Fed, indicate that the increase is more to appease inflation hawks than to definitively change course. That second, slower stage of economic growth in 2017 and 2018, he said, will occur as the Fed gradually raises its target interest rate to around 3.25 percent to 3.5 percent, a level he sees as the likely long-run neutral rate. If that happens, he said, the Fed would not hesitate to cut rates and perhaps buy more bonds or promise to keep rates low for a certain period of time. It’s like an army that’s got all of your forces out there, you don’t have a lot of reserves,” said Williams. “It’s hard to feel like, well, I’m feeling any kind of sense of victory or something.” In fact, the risk that wages will continue to stagnate — as they have for decades for most people — should be a far more worrisome issue for policy makers than a distant and theoretical risk of inflation.

With rare exceptions, both parties are so organized and their nominees so skilled that they neutralize each other; their respective strengthes and weaknesses just don’t matter.

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