Fed raises interest rate for first time in seven years

23 Dec 2015 | Author: | No comments yet »

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

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. 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. Ahead of the December meeting, many economists and analysts argued (loudly) for a rate increase at year-end, a call based on expectations of a markedly improving economy, while many others – ourselves included – argued for a further delay in liftoff into 2016 given an expected still-tepid pace of economic activity. 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. To keep job creation strong, rates will need to stay low, rising only modestly next year, he said, adding: “We are going to run a higher-pressure economy for a while.” If the economy springs any surprises, he said, the Fed will respond as needed. 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. This week’s interest rate increase, though small, is significant, because it is a sign that the Fed has again let fighting inflation take precedence over pursuing full employment. 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.

However, raising rates now helps protect against the need to raise rates at a faster pace later on, an aggressive policy action which could stunt the modest improvement in the economy that we have seen thus far. A seemingly counterintuitive argument, the Fed’s determination to wait for improvement appears to have finally been worn down after years of near-zero interest rate policy, accepting this so-so economy to be “as good as it gets.” While this declining resolve has ultimately resulted in higher rates, it hardly offers confidence that the economy is on an upward trajectory from here.

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. 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.

Concern about the threat to US growth from China is misplaced, but there will be a deflation threat until China stabilizes… The Fed: Federal Reserve monetary policy has been complicated by the combination of the advanced stage of the US business cycle relative to the rest of the world and the failure of commodity markets to respond positively to QE.Liftoff was an inflection point in monetary policy that will make future policy decisions more difficult to decipher until the Fed’s new reaction function is more clearly established. 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.

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