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Morning Users;
markets are now excluding a Fed rate hike for March as inflation is clearly not picking up despite low unemployment rates. 2015 CPI is stalling at 0.7% y/y, far away from the Fed's target of 2%. A rate hike in April seems also very unlikely with a likelihood of 2%. The dollar has sharply weakened as a result of those expectations. Fed's Chairwoman Janet Yellen has spoken last week in front of the congress to deliver the Fed's semi-annual Monetary Policy Report.
Janet Yellen had been a little bit surprising at this session.
She mentioned for the first time negative interest rates. Logically she announced that the Fed is ready to delay hikes but she has, of course, refused to admit that the current Fed strategy to achieve a normalized monetary policy has so far proven inefficient.
She mentioned that overall financial conditions have become less supportive of growth. In particular that unemployment rates have lowered but better job conditions have not provided the awaited effect of a decent wage growth necessary to spur inflation toward the Fed's target.
Yellen also claimed that she is wary of increasing rates too abruptly in case this pushes the economy in recession.
The real truth is that American debt is way too large ($18 trillion) and interest on this debt would explode if interest rates increased too much. This is why, Yellen is now considering negative interest rates to avoid this from happening and especially to prevent a recession. Yet, at some point inflation is needed to destroy debt, but this is not on the cards anytime soon because in our view job market conditions are largely overvalued.
As a result, we think that there is a strong possibility of a QE4 which would be synonym of fresh money to save GDP. We are no longer in the era of monetary policy divergence or normalization. We are now firmly in negative interest rates territory and Yellen is considering this option despite the fact that she “is not sure if Fed can do it”.
For the time being, stocks markets are suffering from such an unclear monetary policy and we consider that the Fed is not in full control of the situation. As we have been mentioning since last year, rate hikes seem more and more unlikely this year. Currency wise, we now expect a temporary surge of the dollar against the single currency as European uncertainties are not over. Pressures on the EURUSD will still remain bearish over the medium-term.
Regards All.
markets are now excluding a Fed rate hike for March as inflation is clearly not picking up despite low unemployment rates. 2015 CPI is stalling at 0.7% y/y, far away from the Fed's target of 2%. A rate hike in April seems also very unlikely with a likelihood of 2%. The dollar has sharply weakened as a result of those expectations. Fed's Chairwoman Janet Yellen has spoken last week in front of the congress to deliver the Fed's semi-annual Monetary Policy Report.
Janet Yellen had been a little bit surprising at this session.
She mentioned for the first time negative interest rates. Logically she announced that the Fed is ready to delay hikes but she has, of course, refused to admit that the current Fed strategy to achieve a normalized monetary policy has so far proven inefficient.
She mentioned that overall financial conditions have become less supportive of growth. In particular that unemployment rates have lowered but better job conditions have not provided the awaited effect of a decent wage growth necessary to spur inflation toward the Fed's target.
Yellen also claimed that she is wary of increasing rates too abruptly in case this pushes the economy in recession.
The real truth is that American debt is way too large ($18 trillion) and interest on this debt would explode if interest rates increased too much. This is why, Yellen is now considering negative interest rates to avoid this from happening and especially to prevent a recession. Yet, at some point inflation is needed to destroy debt, but this is not on the cards anytime soon because in our view job market conditions are largely overvalued.
As a result, we think that there is a strong possibility of a QE4 which would be synonym of fresh money to save GDP. We are no longer in the era of monetary policy divergence or normalization. We are now firmly in negative interest rates territory and Yellen is considering this option despite the fact that she “is not sure if Fed can do it”.
For the time being, stocks markets are suffering from such an unclear monetary policy and we consider that the Fed is not in full control of the situation. As we have been mentioning since last year, rate hikes seem more and more unlikely this year. Currency wise, we now expect a temporary surge of the dollar against the single currency as European uncertainties are not over. Pressures on the EURUSD will still remain bearish over the medium-term.
Regards All.