Markets vulnerable to U.S. rates news

FRANKFURT – US JOBS data due this week may hold the key to whether the US Federal Reserve (Fed) will raise interest rates for the first time since 2006 next month, signalling its intention to end an era of almost-free dollars.

The Federal Reserve had their monthly meeting on Wednesday, and during this meeting, it was known that December would likely be when the interest rate hike would happen.

In fact, the opposite is likely true: As in Japan, where more than a decade of zero interest rates and fiscal stimulus failed to restore anything like normal growth, the USA economy would likely be better off now had both monetary and fiscal policy reverted to neutral and instead allowed the economy’s natural restorative forces unleash themselves.

The Australian dollar gained 0.25 percent against the USA dollar to $0.7163 after the Reserve Bank of Australia announced it would leave interest rates unchanged.

Consumer spending grew at a 3.2 percent rate, but its contribution to overall domestic growth was undercut by a sharp cutback in inventory building, which resulted in a 1.5-percent increase in the government’s first reading in gross domestic product in the third quarter, the Commerce Department said.

As expected, there was no change to policy at the October Fed meeting.

Raising interest rates is a way to keep an economy simmering along healthily without boiling over. Given current US inflation levels, and given the Fed’s increased tolerance for rising inflation in the current economic environment, it’s hard for me to envision how the USA inflation data will cause the Fed any significant concern for a few time yet.

“Indeed, the risk of Fed policy withdrawal is at a two-year low, suggesting complacency about the threat of higher rates”, warned Felices.

But comparisons to Europe aside, by USA standards the recovery has been very weak.

Last week’s Fed statement said that policy makers are considering a rate hike at the early December meeting. “(But) when it comes to the labour market, the United States is in a position to hike rates”. Five-year fixed-mortgage rates are available in the 2.49% to 2.59% range, and five-year pre-approval rates can be found at rates as low as 2.64%.

The two-year German bond yielded negative 0.320% on Tuesday. The U6 rate of unemployment-often cited as a more accurate indicator of job growth because it factors in underemployment-has the USA unemployment rate at 10 percent, markedly higher than the headline number of 5.3 percent.

The Fed, which has a dual mandate including inflation and employment, put a rate hike next month firmly in play over the past week and investors will be scrutinising Friday’s U.S. employment data to work out the odds of such a move.

The traders in the market are now looking at the employment report for the country, which will be coming out next Friday.

The Federal Reserve building

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