Published: Mon, June 19, 2017
Markets | By Noel Gibbs

Exchange rates stable despite Fed rate hikes

Exchange rates stable despite Fed rate hikes

The Federal Reserve Building in Washington, D.C. Image source: Getty Images.

The Fed also outlined its plan to reduce its $4.2 trillion (€3.7tn) portfolio of Treasury bonds and mortgage-backed securities, chiefly purchased after the financial crisis hit. For more information about the Fed's balance sheet, please read Inside the Fed's Balance Sheet (The Biggest in the World). Fed Chair Janet Yellen in her post-meeting press conference explained that the ingredients are in place for inflation to rise. Notwithstanding the problem of bad loans and overleveraged corporate balance sheets, economic growth is expected to pick up pace and the India premium over other emerging markets in the stock markets is intact. There will be quarterly increases in the amounts involved. The bank is not expected to change rates, despite surging prices, but investors will be paying close attention when Governor Mark Carney gives a speech to finance chiefs at 4 p.m. ET. "I don't think the economy is as good as it looks", Cashin said on CNBC. The cap would escalate in three-month intervals. When that was the time they dropped interest rates and bought up USA coffers and mortgage-backed securities to keep rates low.

The Fed stressed that it would reverse the policy of reducing the balance sheet if there were "a material deterioration in the economic outlook".

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One member of the Fed dissented: Neel Kashkari, who wanted to keep the federal funds rate unchanged.

They were bound to clash: Lyndon B. Johnson, the new president, and William McChesney Martin, the longtime, fiscally conservative Fed chairman.

"With the lagged effects of previous hikes yet to come through - it takes an average 18 months before rate hikes affect consumer spending in full - delayed tax cuts, potential protectionism and cold winds elsewhere, this should mean a "peak" rate under 2 per cent - way lower than the historic average of 5 per cent".

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"The fact that the Fed is tightening against the backdrop of slowing inflation implies that the market continues to price in policy error", Jabaz Mathai, head of US rates strategy at Citigroup Inc., said in a note.

"In any case, any acceleration in wages and inflation is likely to be gradual, meaning the Fed will be under little pressure to tighten policy in the next few months". The bond market seems to be showing less confidence in the economy than the Fed, with the benchmark 10-year T-Note yield testing its lowest level of 2017.

"The Fed announcing an update to their reinvestment principles leaves September open (for) the start of balance sheet runoff, and the fact that they haven't slowed their projected path of rate hikes suggest they can do both balance sheet and rate hikes at the same time", said Gennadiy Goldberg, interest rate strategist at TD Securities.

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