Why Fed monetary policy tightening, or at least warnings of it, could come sooner than currently anticipated, and ramifications for virtually all global markets
The following is a partial summary of the conclusions from the fxempire.com weekly analysts’ meeting in which we share thoughts about future scenarios and market movers.
Summary
- QE’s influence on employment is waning.
- Deflation threats are weakening.
- While the probability of inflation may be low, its risks are significant, so the Fed must be cautious, especially given its poor forecasting record.
- Even mere signals of rising rates may carry new benefits for US foreign policy
- The key ramifications and questions for global markets
Few expect any meaningful increase in US interest rates before mid-2015 because:
- The Federal Reserve has made clear that it won’t raise rates until US employment improves and that its continued recovery no longer needs exceptionally accommodative Fed policy.
- Continued low inflation relieves the Fed of any pressure to tighten before it is satisfied that US employment.
- While the Fed claims otherwise, it surely considers that rising US rates pressure the global recovery as they force higher risk economies to raise rates or see capital outflows to the perceived better risk/reward of the US. Repeated US moves to ensure USD liquidity to European banks during various stages of the EU crisis confirm that the Fed understands the potential for global economic weakness to hit the US too.
Guess what? All of the above drivers of continued low rates are weakening. Below we consider these and another reason why the Fed might start at least signaling a rising chance for tightening sooner.
Continued Signs That QE’s Power To Boost Employment Is Exhausted
QE’s contribution to employment mostly done, inflation bottoming, and could snap back if in fact employment and wage data continues to improve. Now just waiting for deflation threat to ease and that will be sign of coming tightening go over best charts for all charts on labor slack, jobs, us deflation/inflation.
QE Not A Solution For The Largest Chunk Of Unemployed
There is still plenty of overall slack in US labor market.
Why Fed Tightening Signals Could Come Sooner Than Expected & Investor Ramifications
(via Business Insider/Matthew Boesler here)
06 Apr. 25 17.15
