Tips for Trading the Financial Markets this Week
The recent Fed rate hike of 25-basis points on Wednesday June 14, 2017 was the second increase to the Federal Funds Rate for the year. It is especially important as it relates to the USD and Wall Street indices. The Federal Reserve Bank has an inflated balance sheet of assets valued at $4.5 trillion and it is in the process of unwinding its asset holdings. Back in 2008, the Fed’s balance sheet was approximately $700 billion. The Fed currently holds some 33% of long-term bonds and some 15% of government debt. Given the Fed’s desire to reverse monetary policy from one of quantitative easing to one of quantitative tightening, the Fed will be required to sell bonds. The Fed wants to do this gradually. Initial accounts anticipate the Fed allowing $4 billion of mortgage bonds per month to expire, and $6 billion worth of Treasuries. The impact of this on financial markets is unknown. However, the Fed has embarked upon a process of gradual monetary easing.
Overall, the Fed’s activities should be bullish for the USD, but they appear to be bearish. More importantly, the interest-rate hikes have had the opposite effect on gold bullion, causing the precious metal to rise, rather than to fall. Equally interesting is the impact the Fed rate hikes are having on Wall Street indices. Instead of causing increased anxiety through greater costs on borrowed capital, Wall Street Bourses have risen. The gradual approach adopted by the Fed is indicative of the cooling of the US economy. Even the Federal Open Market Committee (FOMC) members have downgraded their expectations of Fed rate hikes for 2017, 2018 and 2019. This is the clearest such indicator that the US economy is a little slow out of the blocks. For example, the March 2017 FOMC forecast for interest rates was 1.40%, but the June forecast is 1.38%. For 2018, the March forecast was 2.32%, but the June forecast is 2.23%. Similar trends can be seen for the March forecast for 2019 at 2.89% and the June forecast for 2019 at 2.85%.
