Global Markets: Dollar rides a Fed wave higher; stocks, oil drop

Charlene Craig
October 20, 2018

Trump says he doesn't speak with Chairman Jerome Powell because of the Fed's independence, but "I'm not happy with what he's doing because it's going too fast" in raising rates at a time when inflation has remained relatively low. Neutral is the level of interest rates judged to be neither accommodative nor punitive to the economy.

"The real driver of this correction is concerns surrounding demand growth and trade issues", said Gene McGillian, vice president of market research for Tradition Energy in Stamford, Connecticut. The median view of all Fed officials was that rates should be increased one more time this year and three times next year and a final quarter-point rate hike in 2020.

Federal Reserve projections released in September showed policymakers lifting their estimate of that "long run level" to 3%, from 2.9% back in June. "While the PBOC is comfortable with some yuan weakness as long as it is driven by market forces, the data suggests it was intervening to support the yuan that month", said Westpac Asia head of macro strategy, Frances Cheung.

Minutes from the Fed's latest policy meeting showed board members expect to hike borrowing costs as the world's top economy goes from strength to strength and inflation picks up.

Stock markets mostly dipped on Thursday on the news that some policymakers at Federal Reserve think interest rates should continue to be raised until they are slightly restrictive.

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President Donald Trump's repeated complaints about rising interest rates appear to be having no impact on policy so far. Long-term interest rates, which are just as important to economic growth, are not under its control.

"Powell's task has been made much more complicated by what Trump has said", said economist Joseph Carson.

As a result, Bullard said the federal funds rate should stay where it is now, at a range of between 2.00 percent and 2.25 percent, until something clearly changes for better or worse.

Randal Quarles, the Fed's vice chairman for supervision, made a speech at the Economic Club of NY on Thursday, saying that he was optimistic about the US economy due to a tight labor market and the positive outlook in productivity.

Still, as USA interest rates have risen, the U.S. dollar has strengthened further, which makes American exports more expensive. Rising rates tend to lift their respective currencies and vice versa.

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Amid his recent avalanche of criticism, the president has repeatedly lambasted the Fed chairman and his colleagues for hiking rates when inflation isn't a problem. This decreases the amount of capital flowing around the financial system and eventually curtails economic growth.

Under Powell, the Fed has been gradually raising rates as the economy has strengthened as a way to prevent a run-up in inflation.

That would begin to close the still-widening gap between interest rates on either side of the Atlantic ocean, providing a boost to the currently-beleaguered British currency while lifting the Pound-to-Dollar rate in the process.

Trump is also anxious about the impact of the dollar on trade. And those forecasts already assume a steady pace of one hike per year in the interim.

Quarles said that it is not unusual for presidents to comment on Fed policy.

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