Four Fed rate in­creases in 2016?

The Pak Banker - - OPINION - Mark Gil­bert

WHEN the Fed­eral Re­serve raised its bench­mark in­ter­est rate in De­cem­ber, the pre­vail­ing mood mu­sic was that the move prob­a­bly pre­saged four more in­creases -- one per quar­ter -- in 2016. But with global stock mar­kets in a tail­spin and the eco­nomic back­drop de­te­ri­o­rat­ing, re­cent com­ments from Euro­pean Cen­tral Bank Pres­i­dent Mario Draghi and Bank of Eng­land Gov­er­nor Mark Car­ney sug­gest Janet Yellen might end the year with a mon­e­tary pol­icy not that far from where it started. In the wake of the Fed's Dec. 16 quar­ter-point hike in the up­per rate of its tar­get rate to 0.5 per­cent, traders started to an­tic­i­pate the Fed's next moves. By the end of last month, prices in the fu­tures and op­tions mar­kets sug­gested a bet­ter than 50 per­cent chance that the cen­tral bank would raise rates again at its March 16 meet­ing. Here's what's hap­pened to those ex­pec­ta­tions in the past few weeks:Given the wors­en­ing out­look for global growth, it's no sur­prise that traders are scal­ing back ex­pec­ta­tions for how quickly the Fed might move. Here's how Car­ney at the U.K. cen­tral bank de­scribed the cur­rent en­vi­ron­ment in a speech on Jan. 19:

Now is not yet the time to raise in­ter­est rates. The world is weaker and U.K. growth has slowed. Due to the oil-price col­lapse, in­fla­tion has fallen fur­ther and will likely re­main very low for longer. Fur­ther down­side risks to the global out­look re­main, re­flect­ing the on­go­ing chal­lenges in China, fragili­ties in other ma­jor emerg­ing mar­ket economies and the po­ten­tial for con­ta­gion.The change in the out­look for U.K. in­ter­est rates has been even more dra­matic than for U.S. pol­icy. At the start of the year, higher bor­row­ing costs by Novem­ber were a done deal, ac­cord­ing to mar­ket prices. In the past three weeks, those ex­pec­ta­tions have been wiped out: While traders are an­tic­i­pat­ing that the U.K. cen­tral bank won't tighten mon­e­tary pol­icy in the com­ing months, the ECB is mak­ing no se­cret of its in­ten­tion to loosen its pol­icy even fur­ther. At his reg­u­lar press con­fer­ence on Thurs­day, Draghi said "down­side risks" have in­creased since the start of the year, and his in­sti­tu­tion will have to con­sider chang­ing its stance at its next meet­ing in March. "We are do­ing what­ever is nec­es­sary to com­ply with our man­date," he said. For sure, the U.S. is in bet­ter shape than ei­ther the euro zone or the U.K. Here's U.S. Trea­sury Sec­re­tary Jack Lew ad­dress­ing the World Eco­nomic Fo­rum in Davos, Switzer­land, on Thurs­day: The United States con­tin­ues to grow, and it's still a source of con­fi­dence in the world. There are a lot of head­winds, and there are fac­tors out there in the world to be fo­cus­ing on, but I think it's im­por­tant to start with where are we. There are plenty of clever peo­ple who think the Fed made an er­ror in rais­ing rates in De­cem­ber.

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