Published: Sat, October 20, 2018
Finance | By Loren Pratt

US Fed officials signal further gradual rate hikes

US Fed officials signal further gradual rate hikes

- Rising rates to support United States dollars in short term, but further down line.

President Donald Trump really, really wants interest rates to stay low, and judging by his recent tweets and media musings, berating the Federal Reserve Board and Fed Chairman Jerome Powell is the best way to achieve that.

Unemployment fell last month to 3.7 per cent, its lowest level since 1969, and economists say the central bank is unlikely to be pushed off course by Wall Street selloffs or other noise.

"The market doesn't really know what to think at this point".

With a huge balance sheet driven by previous quantitative easing and an interest rate just slightly over inflation, monetary policy is still highly accommodative.

The rand retreated early on Thursday after minutes from the US Federal Reserve's September meeting struck a hawkish tone, draining some of the enthusiasm for emerging currencies that lifted the local unit to a two-week peak.

There is ample research on the US and elsewhere showing that a one-percentage-point increase in the budget deficit has the effect of raising interest rates a quarter of a percent, or more.

Even the possibility of a headwind to economic growth, however, has provoked Trump into a series of attacks on the Fed and Powell.

Still, the minutes showed that, for the moment at least, American policymakers were largely in agreement about the near future - despite the increasing heat from the president, who fears higher rates will derail his economic agenda. But they also pushed back on worries that a hot labour market would soon spark inflation and a more aggressive Fed response, which could truncate the near-record long economic expansion.

But rates moving above the so called neutral level would provide an added incentive to get shot of the US currency, because such a move may lead the USA economy to slow.

US authorities are concerned when any nation devalues its currency because it gives that nation's exporters a competitive price advantage over their USA rivals.

The hike was the third of this year and the display of unanimity at the September 25-26 meeting could bolster expectations the central bank's rate-setting committee will raise rates again in December. Traders of futures contracts tied to the Fed's policy rate see rates topping out at about 3 percent. Analysts have pointed to rising interest rates, which can make stocks a less attractive investment. Rising rates tend to lift their respective currencies and vice versa.

"Overall, nothing here to change our view", said Paul Ashworth, chief USA economist at Capital Economics.

Bullard is not now on the Fed's rate-setting committee but will join it in 2019. That will slow the economy down some and prevent overheating, which could lead to inflationary pressure.

That would begin to close the still-widening gap between interest rates on either side of the Atlantic ocean, providing a boost to the currently-beleaguered British currency while lifting the Pound-to-Dollar rate in the process.

Profits at S&P 500 companies are expected to have risen 21.9 percent in the quarter, according to I/B/E/S Refinitiv. And those forecasts already assume a steady pace of one hike per year in the interim.

At 2.58pm, the rand was at R14.2647 to the dollar from R14.2498, at R16.4055 to the euro from R16.3903, and at R18.6902 to the pound from R18.6904.

The key technical levels remain the same as the market is trapped in a relatively tight trading range.

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