A stable world paves way for a March US Fed rate hike
washington — In just a week, markets went from doubting a March rate increase to viewing one as a sure bet. The central bank’s top brass engineered the change by speaking in favour of a hike, culminating in Fed Chair Janet Yellen’s endorsement on Friday.
What changed to push central bank policymakers from the neutral stance that Fed-watchers saw in their January meeting minutes to the brink of a rate increase? Not much, if you’re looking at US data. The fact that nothing deteriorated was enough to clear the hurdle for a March rate move, especially because steady domestic data have come alongside a slowly-improving international outlook a major shift from the situation at this time last year, when global risks helped to stay the Fed’s hand. The steady US
There is almost no economic indicator that has come in badly in the last three months Stanley Fischer, Vice-Chairman, Fed
economy and sunnier international situation that have given policymakers the confidence to prime markets for a March 15 hike.
“There is almost no economic indicator that has come in badly in the last three months,” Fed vicechairman Stanley Fischer said on Friday at a forum hosted by the University of Chicago’s Booth School of Business. Likewise, Yellen said employment and inflation are evolving in line with the Federal Open Market Committee’s expectations, while prices haven’t broken out dramatically to the upside, they’re still moving toward the Fed’s goals. Unemployment has “essentially met” what officials see as full employment, Yellen said on Friday. Low joblessness isn’t a major change from last year, though wages are very slowly crawling higher, suggesting that the labour market is getting tighter. And the outlook for output growth hasn’t changed much.
New York Fed President William Dudley said the economy is still on about a two per cent growth track, speaking in a CNN interview on February 28. He then signalled a willingness to raise rates soon. In short, the US economy isn’t experiencing a breakout moment, but it’s holding up. Evidently, that’s all the Fed needed to see.
Risks abroad: “receded somewhat” Yellen said China “has continued to grow and its management of its currency has been better understood and led to less volatility,’’ while Brainard said government officials there had “stabilised growth and calmed fears of financial instability.” The economic environment isstabilising, China’s manufacturing sector and is posting gradually better results.
Euro area headline inflation has been climbing, providing fresh arguments to those calling for an exit from the European Central Bank’s monetary stimulus programme,though core inflation remains below one per cent. Euroarea unemployment was unchanged at 9.6 per cent in January, the lowest since May 2009.
What has changed significantly is that threats from abroad are looking less scary. As long as that remains the case and US data remain steady between now and March 15, the Fed appears poised for its first non-December rate increase since June 2006. — Bloomberg