Fed to ‘probably’ hike this year, hit inflation target by 2016: Dudley

28 Sep 2015 | Author: | No comments yet »

Fed’s Dudley Says U.S. on Track for 2015 Interest-Rate Increase.

Long-term U.S. government bonds strengthened Monday as worries over China’s economic slowdown and its impact on the global economy boosted demand for haven assets.While she reiterated last week that the Fed expects inflation to gradually rise back near 2 per cent, long- and short-term market forecasts for price gains have plunged to their lowest levels since 2009.It’s been a rough stretch of trading days since that fateful Federal Reserve meeting, with the S&P 500 SPX, -0.05% closing lower in six of the last seven sessions.

Dudley said the central bank will “probably” raise interest rates later this year despite uncertainties over global growth. “I think that the economy is doing pretty well,” Dudley said at an event Monday in New York. The index is down by more than 6% this quarter as the final days wind down, putting it on track to be the worst quarter since 2011, when the S&P shed 14%, according to Michael O’Rourke of Jones Trading. “The [Fed’s] transparency policy serves as an open window to view central bankers who lack clarity, consistency and conviction,” he says. “Endlessly easy policy has undermined the Fed’s credibility for years, but so has the lack of consistency between the policy maker’s words and actions.” James Grant, the man behind our call of the day (see below), is a bit more critical in his assessment of Janet Yellen and the Fed. “Helicopter money” may be the next thing, he says, as we continue to skip and whistle “in the age of magical thinking.” Magic aside, the bears have the upper hand in this market.

But she cited another force behind cooling inflation — the stronger dollar, which depresses import prices, as shown in a chart accompanying her speech. “They’re utilising a monetary policy that’s not designed to influence what’s going on right now,” said Jack McIntyre, a portfolio manager with Brandywine Global Investment Management, which oversees $67 billion in Philadelphia. In the press conference following the Fed’s Sept. 17 decision to hold its benchmark rate near zero, where it’s been since 2008, “she talked a lot about global, external influences, and that’s going to take some time to resolve itself,” McIntyre said. Yellen said Thursday that declining demand for inflation compensation, as measured by the difference between yields on inflation-linked Treasuries and those on nominal securities, may indicate that traders have very low inflation forecasts. “Although the evidence, on balance, suggests that inflation expectations are well anchored at present, policymakers would be unwise to take this situation for granted,” she said in her remarks.

If you went away in May — and are still a sucker for such trends — then it’s time to start thinking about buying again (see “the chart”). “Once the sellers exhaust themselves, buyers will creep back in and then drop the #$@# anvil of absolute death onto their faces. Traders’ bets following the Fed decision indicate they see interest rates only rising to 0.71 per cent by the end of 2016, about half as high as the median forecast from Fed policymakers. Dudley said China is the largest factor among international developments the Fed is watching, though he stressed external forces mattered only to the extent they influenced the central bank’s progress on its goals for 2 percent inflation and maximum employment. That’s all there is to it.” Monday blues are infecting the market early, with futures on the Dow YMZ5, -0.62% and the S&P ESZ5, -0.63% dressed in red.

Anxiety over a slowdown in China’s economy has helped push down the prices of riskier assets since the summer, and the demand for safety has sent the 10-year Treasury’s yield lower, compared with this year’s peak of 2.5% in June. Meanwhile, lower commodities prices and plunging emerging-market currencies have muted concerns about inflation, which chips away long-term bonds’ fixed value over time. Monday’s data showed the price index in August for personal consumption expenditures—the central bank’s preferred inflation gauge—rising 0.3% from a year earlier. He said the inflation goal was not a ceiling for policy makers and he wouldn’t be disturbed if inflation went over the target, before adding, “I don’t think we’re going to deliberately try to overshoot 2 percent.” Investors put $1.18 billion net cash into U.S.-based mutual funds and exchange-traded funds targeting the Treasury bond market for the week ending Sept. 23, according to fund-tracking company Lipper.

Fed-funds futures, used by investors and traders to place bets on central bank policy, showed Monday that they see a 14% likelihood of a rate increase for the Fed’s October policy meeting, up from 11.5% on Friday, according to data from CME Group. Alcoa AA, -1.20% says it will split into two publicly traded companies, one “upstream” and the other “value-add”, with completion in the second half of next year. German prosecutors have opened a fraud investigation into former CEO Martin Winterkorn, while Audi has revealed that 2.1 million of its vehicles have the emissions-rigging software installed. Nexstar NXST, -2.56% has made a bid to buy local-television station owner Media General MEG, -1.59% The proposal values Media General at about $1.85 billion, but the deal is worth $4.1 billion when debt is included. U.S.-listed shares in SABMiller SBMRY, +0.81% are nudging up in premarket trade after a report that Anheuser-Busch InBev BUD, +2.48% has decided to bid $106 billion to take over its beermaking rival.

President Barack Obama is slated to hold talks with Indian Prime Minister Narendra Modi today, as the two men look to strengthen the relationship between their respective countries in the face of an increasingly assertive China. In Europe, separatists in the wealthy Catalonia region claimed victory the weekend in an election they believe will lead to their independence from Spain. That’s not as farfetched as it sounds, according to James Grant, founder and editor of “Grant’s Interest Rate Observer.” He says we’re in a “never-ending, circular process” that will eventually lead to some pretty unconventional ideas. “I dare to say that we have not yet seen the most radical brainwaves of the mandarins running our central banks,” Grant said in an interview with Finanz und Wirtschaft. Yellen took some of his heat, as well. “If a difficult decision needs to be taken, a person who’s so anxious or so much of an impulsive risk minimizer is perhaps not the best qualified to take sometimes a leap into the dark,” he wrote.

And Callum Thomas, investment strategist at AMP Capital, tweeted this friendly reminder. $47.5 million — that’s how much “Hotel Transylvania 2” brought in over the weekend to set a September opening record, despite a lukewarm reception from critics. “We challenge the tech industry to do far more for those most marginalized, those trapped in poverty, and those beyond or on the edge of the network.” — Bono, or Facebook’s Mark Zuckerberg, in a New York Times shared byline over the weekend urging global connectivity for everyone.

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