Fed appears committed to gradual tightening despite Trump criticism

Share

Trump in August said he was "not thrilled" with Fed Chairman Jerome Powell for raising interest rates, and has since escalated his criticism, this week saying the central bank is his "biggest threat" and last week calling the Fed "crazy", "loco", "ridiculous" and "too cute".

The "neutral" rate of interest is the equilibrium level at which rates themselves neither encourage nor restrict economic activity.

"The real driver of this correction is concerns surrounding demand growth and trade issues", said Gene McGillian, vice president of market research for Tradition Energy in Stamford, Connecticut.

The Federal Reserve is expected to raise rates again in December, but it appears that this expectation is factored into current market sentiment.

Federal Reserve projections released in September showed policymakers lifting their estimate of that "long run level" to 3%, from 2.9% back in June.

"If there are emergencies that affect the exchange rate, the Treasury has this bank account to the New York Fed that they're allowed to use to send trade orders through the Fed", Richardson explained. "But as borrowing costs rise that will challenge that return on capital unless growth potential increases, leaving the [Dollar index] a fade towards the highs".

Under Powell, the Fed has been gradually raising rates as the economy has strengthened as a way to prevent a run-up in inflation.

More news: Trump defends Saudis in Kashoggi case, makes Kavanaugh comparison
More news: China to launch artificial ‘moon’ into orbit to light up cities
More news: Fan interference wipes out possible homer for Altuve in ALCS

While the USA dollar has strengthened along with the entire domestic economy - which grew at a rate of 3.2 percent over the first half of 2018 - China's renminbi, also known as the yuan, has continued to fall in value. With economic growth accelerating and wages increasing due to a historically low unemployment rate, it is important for the Fed to maintain a disciplined approach in managing inflation.

"The last thing emerging markets, or the US yield curve or equities, want is a reminder that USA rates are going to keep going up", Rabobank analysts told clients in a note. The continued "gradual" rate increases are regarded as insurance against that possibility. One further hike in 2020 would take it to 3.5%.

No country has been labeled a currency manipulator by the United States since the Clinton administration tagged China in 1994.

There is some truth to what the USA president is saying.

China's yuan halted its recent sharp slide on Friday after statements from senior regulators pledging support for private firms facing liquidity problems and because official data showed the central bank undertook smoothing operations to support the currency. 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.

"Unlike yesterday's rally where participation was relatively light, early volumes are looking robust, suggesting investors continue to probe markets downside where more significant tail risk remains".

Share