Fed to walk ‘tightrope’ on rates at meeting’s end

17 Dec 2014 | Author: | No comments yet »

Eerie calm amid eye of the risk-aversion storm.

On Wednesday, December 17th 2014, all eyes will be on the Federal Open Market Committee as the group wraps up its 2-day meeting. Treasuries fell before Federal Reserve policy makers wrap up a meeting amid speculation they’ll look beyond Russia’s currency crisis and discuss dropping a pledge to keep interest rates low for a “considerable time.” U.S. debt pared losses after a report showed inflation declined in November by the most in almost six years, depressed by falling energy prices.AUSTRALIA’S sharemarket looked to be in the eye of a storm yesterday as risk aversion tied to the collapse in oil prices and the Russian rouble swirled through international markets before the outcome of the US Federal Reserve meeting overnight. Investors are looking ahead to the Federal Reserve’s final policy meeting of the year this afternoon amid mounting concerns over the decline in the price of oil and Russia’s collapsing ruble.

The benchmark S&P/ASX 200 rose for the first time in seven days, up 0.2 per cent to 5161.9, with energy stocks leading gains after oil prices bounced off a fresh five-year low. McBride expects the Fed to finally jettison from its post-meeting statement the phrase “considerable period of time,” which refers to how long interest rates will be maintained at the current, near 0% levels.

Chair Janet Yellen plans to hold a press conference. “It’s most likely that the Fed will refer to geopolitical or external risks, but we still expect the ‘considerable time’ to be dropped,” said Michael Leister, senior strategist at Commerzbank AG in Frankfurt. “The first rate increase could take place as early as June, and the pressure of rising yields will be more evident at the short end of the market than in longer-dated maturities.” The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 2.08 percent as of 8:50 a.m. in New York, according to Bloomberg Trader data. The rouble pared most of a 20 per cent fall after Russia’s economy minister said capital controls weren’t under consideration, yet the embattled currency was still down more than 20 per cent for the week, despite heavy foreign exchange intervention by the Central Bank of Russia and a massive rise in Russia’s benchmark lending rate. But, he warns, this will be a “tightrope moment” for Yellen and the Fed. “If they misstep in any way — either by freaking out the markets now or surprising them later — we’d see a potentially destabilizing amount of volatility in both the bond and stock markets,” says McBride. “A misstep by the Fed would be unnerving markets now by being more hawkish on interest rates than expected,” signaling earlier rate hikes, says McBride. “Or conversely, if the Fed is too dovish now and has to ramp up the rhetoric later in order to prepare markets for an interest rate increase. Some Fed watchers expect to see a new word—”patience.” Stocks seesawed Tuesday, amid concerns about Russia and as oil first plunged and then stabilized. The ruble has plummeted this week, losing as much as 19 percent yesterday in the biggest one-day drop in 16 years, as panic swept across Russian financial markets after a surprise interest-rate increase overnight failed to stem a run on the currency.

The risk of economic/debt crises in other emerging market nations, particularly Venezuela, and potential stress on emerging markets and commodity funds, could be added to the list of concerns. That’s why it may be too early to buy Australian shares on the view that the economy will benefit from lower oil prices, a weaker exchange rate and potential interest rate cuts.

Macquarie Equities expects the national average petrol price to fall to about $1.20 a litre, generating the same economic boost as cutting the official cash rate by 50 basis points. U.S. central bankers may say they’re monitoring markets carefully as Russia’s currency collapse threatens to destabilize other regions, said David Stockton, a former Fed research director who led presentations of economic and financial data for policy makers. Recent statements by Fed officials have kept the emphasis on upbeat U.S. economic signs, including strong job creation and an uptick in consumer spending, and economists say the latest global throes are unlikely to change that focus.

The currency initially stabilized after the rate hike, but then went into free fall. “The major players that came in and reversed it were probably corporates that were short of dollars,” said Robert Sinche, global strategist at Amherst Pierpont Securities. At the same time, they will keep their focus on U.S. economic strength and probably replace the language on timing with something that says they’re going to be patient with rate increases, said Stockton, senior fellow at the Peterson Institute for International Economics in Washington. Search engine Baidu will invest in taxi-hailing app maker Uber, becoming the latest Chinese Internet firm to take an interest in the flourishing market for transportation apps. But note that in the most recent discussion of financial stability risks in the Monetary Policy Report, the Fed highlighted narrowing credit spreads as a sign of heightened risk-taking—a concern which was echoed in the staff’s latest assessment of financial stability risks in the October minutes,” according to JPMorgan economists. Instead, he said the Fed’s biggest challenge would be explaining its view on inflation, which is running below its target and could stay low with falling oil prices. “They’ve been pretty opaque and confusing.

Since the financial crisis when the Fed cut rates to zero, the S&P has been up an average 0.45 percent on Fed day, but more recently it has been flattish.

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