Treasuries Decline Before Fed’s Decision on Rate-Increase Stance

17 Dec 2014 | Author: | No comments yet »

Eerie calm amid eye of the risk-aversion storm.

The central bank releases its statement and economic forecasts at 2 p.m. 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.

Dec. 17 (Bloomberg) — The Federal Reserve wraps up a two-day meeting as it considers a language change on rates and the impact of the collapse of the Russian ruble and falling oil 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. Bloomberg’s Peter Cook reports on “In The Loop.” I was worried a little bit maybe that janet yellen was at the hockey game last night and maybe that might affect the decision-making in the were choices today — let’s hope not. 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.

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. The big expectations the fed will not just acknowledge the improvement in the us economy in recent weeks, but may have to go further him a signal in interest-rate increase is intact on the radar screen in 2015. they need to do it in a way that doesn’t spook the market, doesn’t convince people the rate hike is imminent. Since this is Yellen’s last press conference before March, now is an “opportune time” for the Fed “to start conditioning markets” for the eventuality of interest rate hikes in 2015, McBride says.

Even in the last 24 to 48 hours, that maybe that is the excuse the fed has for standing pat, that these are the turmoil in markets, maybe justin upton to sway them to keep things — maybe just enough to sway them to keep things pad. 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. So what might that misstep be? “A misstep by the Fed would be unnerving markets now by being more hawkish on interest rates than expected (or signal 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. US 10-year bond yields fell to 2.06 per cent, the lowest closing level in 18 months, as global investors flocked to the safety of US Treasuries despite a strengthening US economy and the conclusion of the Federal Reserve’s bond-buying program in October. The Russian central bank’s demonstration of fear, raising rates from 10.5 to 17 per cent in the middle of the night, had only a brief calming effect before anger and hate became apparent.

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. Global risk aversion could continue to weigh on the resources sector until commodity production is significantly reduced and OPEC stops talking down the price of oil. 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.

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. The median forecast of 84 economists surveyed by Bloomberg called for a 0.1 percent fall. “The number was pretty weak,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the 22 primary dealers that trade with the Fed. “The overriding focus is on the FOMC.” To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net 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. Fed policy makers have suggested they will look past the immediate effect of cheaper oil in depressing prices, and focus on the benefits to the economy. 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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