Monday 18 December 2017

Yellen warned to put US first and hold firm on rates rise

Federal Reserve boss Janet Yellen urged to raise interest rates
Federal Reserve boss Janet Yellen urged to raise interest rates

Chikako Mogi

Futures traders are starting to bet the Federal Reserve will put off raising interest rates, but Fed boss Janet Yellen shouldn't heed them, said Kay Van-Petersen, a strategist at Saxo Capital Markets.

Contracts on the Fed funds rate show traders cut the odds of a September increase by the Fed to 28pc yesterday, from 54pc on August 7.

Investors' doubts that the Fed will tighten policy for the first time since 2006 have been fuelled by a rout that erased more than $5 trillion from the value of global equities since China unexpectedly devalued the yuan on August 11, and sent commodity prices to a 16-year low.

The United States is showing it is ready for higher interest rates and Yellen needs to deliver them, Van-Petersen said.

While Fed officials flagged inflation concerns at their late July meeting, they indicated the economy was "approaching that point" where it could sustain tighter policy.

The Fed has held rates at rock-bottom levels since 2008. "The Fed should raise rates, even if the markets sell off; it should be the economy first," Singapore-based Van-Petersen said yesterday.

"The very worst thing they could do is let the market dictate what they should do." The world has been adjusting to the prospect of interest-rate increases for the US and the UK even as most central banks attempt to stimulate growth by adding accommodation.

China's surprise devaluation this month may spur its exports by loosening the currency's connection to the dollar.

Treasury 10-year yields fell below 2pc for the first time since April of this year and inflation expectations have dropped to the lowest since January as the greenback's gains versus major peers drive down the cost of imports and with crude oil sliding to six-year lows.

That's helped create a policy conundrum for the Fed.

Having spelled out loud and clear the expectation for higher rates, Federal Reserve Chair Yellen needs to deliver to restore the waning credibility of the world's central bankers, Saxo's Van-Petersen said.

She also needs to build up ammunition to counter the next economic downturn, he said.

"If they don't raise this year, after delaying it from March to April and to now September, then no one will believe whatever they say in the future," according to Van-Petersen.

"We seem to have forgotten that ups and downs are part of the business cycle."


Irish Independent

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