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GBP USD Exchange Rate Crashes as Near-Term Fed Rate Hike Odds Rise

04 March 2017

The crowd is now pricing in a 31% probability that the Federal Reserve will lift its policy rate from the current 0.50-0.75% range to 0.75-1.0% at the FOMC meeting on March 13-14, based on CME data as of February 27. Fed fund futures contracts were quick to price in the commentary, with the odds of a March rate hike rising to 98%, the odds of a second rate hike in September rising to 76%, and the odds of a third rate hike this year in December rising to 56%. The question is whether the official who matters most - Chair Janet Yellen - will add her own voice to that impression.

Futures markets have shifted rapidly in recent weeks, with the majority of investors now predicting a rate hike in March rather than in May.

Investors shifted into the USA unit after New York Federal Reserve president William Dudley said there was a strong case for borrowing costs to rise, while his San Francisco counterpart John Williams expects such a move to get "serious consideration" when the bank meets this month.

"We are closing in on full employment, inflation is moving gradually toward our target, foreign growth is on more solid footing, and risks to the outlook are as close to balanced as they have been in some time", Brainard said.

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But that was before some Fed officials began suggesting that the strengthening US economy, signs of higher inflation and a surging stock market had bolstered the case for a rate hike. San Francisco and Philadelphia Fed Presidents John Williams and Patrick Harker have recently indicated interest in a potential March rate hike. The Atlanta Fed's revised estimate of Q1 growth inched up to 2.5% (as of February 27), based on the bank's GDPNow model - a modest improvement over the sluggish 1.9% increase in last year's Q4. And Fed policymakers in December projected three quarter-point rate increases this year and as many as three each and 2018 and 2019, which would bring the rate to 2.9%, according to their median forecast.

"Gold price may see a little bit of selling pressure at this moment on hawkish comments coming from the Fed officials".

As she did in January, Yellen insisted that the Fed was not behind the curve in raising rates, despite having increased them only twice since the Great Recession ended nearly eight years ago. "I am confident that the economy will continue to grow at a healthy pace even as we raise rates", Mr Williams said.

And inflation, which had been lagging at chronically low levels, has been edging steadily up, reflecting in part a rebound in gasoline prices and higher wages. The minutes of the January 31-February 1 meeting showed the central bank is confident that hike will come "fairly soon". At the same time, a key measure of inflation has risen almost to its target rate of 2 percent, a low level that Fed experts say helps the economy grow.