Anxious Interest Rate Expectations

Andamento del mercato - 12/08/2015

With markets increasingly attempting to divine the future of Federal Reserve interest rate policies, the US dollar has been a whirlwind of activity over the last few sessions. In one camp, certain participants are betting that September will be the date of liftoff while the other camp foresees rates not rising until 2016 at the earliest. According to the Federal Reserve’s own estimates for interest rates, two incremental steps are expected in 2015, meaning a rise to 0.75% is not unreasonable considering their own forward looking projections. This is further corroborated by recent comments from important policymakers such as New York Federal President William Dudley, who earlier stressed “hopefully in the near future Fed able to raise rates,” echoing remarks from President Dennis Lockhart who observed “liftoff is very close.”   The reaction in the bond market was swift with Treasury yields plunging as investors race for the safety of bonds amid expectations the Federal Reserve was on track to raise rates sooner rather than later. However, the commentary from certain Federal Reserve members seems to be in direct conflict with the above comments.


Federal Reserve Vice Chairman Stanley Fischer was interviewed on TV earlier in the week, quoted as saying that “the concern about the situation is not to move before we see inflation as well as employment returning to more normal levels.” The recent stretch of weak performance of inflation measures shows that expectations for the outlook are not necessarily well anchored or heading towards the longer-term target of 2% sought by the Federal Reserve. Inflation was determined to be a critical component of any shift in monetary policy and the more dovish commentary from the Federal Reserve’s number two policymaker highlights the risk that the Federal Reserve will not act in September. This contributed to much of the softness in the US dollar over the past few sessions, with USD giving up further ground today versus all the major cross currencies including the Euro, Yen, Pound and Franc. Most notably, gold prices have surged higher, rising back above key resistance at $1120 per troy ounce with the next major hurdle on the upside at longer-term level sitting at $1132.

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