Bank of Mexico Raises Rates for First Time Since 2008

23 Dec 2015 | Author: | No comments yet »

Falling One-Week Pound Volatility Masks Sterling’s Risks in 2016.

The U.K. currency’s one-week implied volatility against the dollar headed for its biggest weekly slide since September after the Federal Reserve raised U.S. interest rates for the first time in almost a decade, ending months of speculation about the path of monetary policy in the world’s largest economy. Agustín Carstens, who also chairs the policy advisory committee of the International Monetary Fund, said Thursday the orderly reaction so far in emerging markets to the U.S. Sterling dropped to an eight-month low versus the greenback Thursday after the Fed’s decision underscored the divergence in monetary policy between the U.S. central bank and the Bank of England. Federal Reserve’s rate increase could be sustained, noting that the coming moves will likely be less transcendental. “A very important thing is that this first step taken by the Fed had taken on a mystical quality, but I think that in subsequent actions taken by the Fed that characterization won’t apply,” said Mr.

Traders aren’t fully pricing in a rate increase of 25 basis points from the BOE until February 2017, according to forward contracts based on the sterling overnight index average, or Sonia. “It’s going to get choppy” for the pound, said Jane Foley, a senior currency strategist at Rabobank International in London. “There’s going to be a lot of indecision about when the U.K. hikes interest rates and indecision about when the Fed are next going to hike.” Implied volatility for the pound versus the dollar, a measure of anticipated price swings over the next week based on options, fell 35 basis points, or 0.35 percentage point, to 6.54 percent as of 12:03 p.m. Rates are being increased when there is still severe economic inequality, a lightning-rod political issue that has drawn the same kind of support to Donald Trump on the right and Bernie Sanders on the left. Seven years of near-zero interest rates have hurt Americans looking to put money aside for retirement (effectively losing money in deposit accounts when inflation is taken into account), but helped the wealthiest by propping up the value of share prices and other assets. The peso, the world’s eighth most-traded currency with a daily volume of $135 billion, strengthened after the widely anticipated Fed decision and closed little changed Thursday at 17.06 per dollar. Fed officials believed the “wealth effect” from quantitative easing would benefit the broader economy – akin to the Republican premise of trickle-down economics – by allowing people with more valuable assets to spend more.

Other Latin American currencies, such as the Brazilian real, have also strengthened. “I think that for the time being the solid response can be sustained, but there is constant news that could have an impact on markets,” Mr. The 20 richest Americans have amassed a fortune that is larger than all the wealth of the least wealthy half of the population, 152 million people, according to a recent study by the Institute for Policy Studies, with the biggest income gains coming in the last six years.

Almost 50 per cent of US aggregate income went to upper-income households in 2014, up from 29 per cent in 1970, Pew Research said in a report last week showing a hollowing-out of America’s middle class. Despite record low inflation at home and slow economic growth, the central bank justified the interest-rate rise saying it would avoid further pressure on the peso after a sharp depreciation this year, since the Fed increase is likely to make the dollar more attractive. Carstens, who ran unsuccessfully in 2011 to head the IMF and has left the door open to try again next year when Christine Lagarde’s term ends, praised the Fed’s handling of a process of monetary normalization that will gradually end the age of easy money that started after the 2008 financial crash. “The Fed is acting in a way that’s congruent with its mandate and with the communications it has been carrying out for many months. Banks and credit unions may decide to keep interest rates on savings low while cranking up rates on mortgages and other consumer loans, using the higher rates to recover fees and boost profits. Wage growth has barely moved (rising at around 2 per cent per annum and a lot more slowly than the 3.5 per cent rate the Fed considers healthy) and employment of prime-age working people between 25 and 54 remains remains below pre-recession levels.

This points to more structural problems within the US economy linked to the growing power of corporations, the weakening of labour unions and consumers’ rights and disparities created by uneven taxation and loopholes, none of which falls within the Fed’s remit to correct. “It’s not the Fed’s job to fix income inequality. The bank raised rates in a bid to keep the peso competitive, but annual inflation is at 2.2%, the lowest level in 45 years, and economic growth remains moderate.

That’s their first job and their second job is to achieve full employment,” said Carl Weinberg, chief economist at High Frequency Economics. “With that dual mandate, that’s really all they can hope to achieve, and somebody else is going to have to come up with policies to address income inequality and broadening the reach of the economy.” If, after January 2017, that “somebody else” is one of the Republicans leading the party’s race to the White House, the Fed can expect major changes.

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