The growing case for rising interest rates

Andrew Cummings
March 18, 2017

Seemingly holding onto the idea that "gradual" means no more than two hikes per year is the wrong assessment of the Fed reaction function in our way of thinking.

By last night pretty much everyone expected the Fed to raise rates by 0.25%, and so they did.

(Kitco News) - World stock markets were mostly higher Thursday, in the wake of the Wednesday afternoon US interest rate increase from the Federal Reserve.

US CPI data was in line with expectations as headline prices rose 0.1% for February with the annual inflation rate rising to 2.7% from 2.5% previously and highest rate for close to five years. West Texas Intermediate, the USA benchmark for the price of oil, was up 1.8 percent to $48.58 per barrel.

It is worth standing back from the immediate fray.

Ultra-low mortgage interest rates face a possible danger today. Remember that from December 2008 until December 2015, United States base interest rates were effectively zero. Certainly the market had been on high alert for a more aggressive view towards the path of rate hikes and the result had triggered the unloading of the United States dollars.

A series of public comments from Fed officials in the weeks before the latest meeting swiftly altered that perception and by the time policy makers had gathered in Washington this week, a rate hike had been fully priced into financial markets.

US Treasury yields rose from more than one-week lows on the view that they had fallen too sharply in the prior session after the Fed maintained its outlook for only a gradual pace of interest rate increases this year. Uncertainties remain - not least which policies President Donald Trump chooses to introduce. As far as core inflation is concerned, which strips out volatile food and energy categories, it increased 0.2% over the prior month and 2.2% on a year-over-year basis. The Fed largely stuck with its previous estimates of the pace of increases up to 2019 and the language of its statement was, if anything, a bit less bullish than expected. There are, for the first time since the crisis, clear enough signs of a pick-up in euro zone growth and prices.

The next hike is now expected in June, meaning several days of cheap dollar in hand, causing stocks to soar. But the euro zone is a long way behind the US. All we can say, looking at the USA experience, is that expectations can change quickly, depending on the economic data.

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