In a recent briefing Janet Yellen seems to have declared that she was surprised that inflation has been so low. Official statistics put inflation at 1.3% on an annual basis, far below the magical 2% that is supposed to be the be all and end all of Fed aspirations for northward heading prices.
The Fed seems not to understand why there is so little inflation with the economy doing so well that a rate rise in December is probable and two or three more increases in 2018 are possible. There are various pundits that claim the US is doing well on many fronts with the unemployment percentage employed as an argument to prove that the Wall Street rally is thoroughly justified.
The US stock markets have been hitting new highs recently with the result that it seems as if there is hardly any risk involved in investing in US dollar equities. Even if the FAANGs account for most of the north-bound movement and large numbers of companies have seen their quotations headings southwards, Wall Street hype glorifies the advances made so far and the presstitutes follow along like lemmings.
In first half of the day the pair continued to move, as expected. However, a speech delivered by Governor Powell created a favourable impulse for the buck and elevated it against the Yen by 0.36% just in couple of hours. The fact that the pair did fall below the 112.40 level and made a rebound additionally confirms that it is moving in a medium-term ascending triangle.
HSBC has been fined $175 million on Friday for 'unsafe and unsound' practices in its currency trading business by Fed, as Reuters reported. HSBC failed to monitor chat rooms where traders swapped information about investment positions, the U.S. central bank said, echoing findings by other regulators investigating the $5 trillion-a-day foreign exchange or FX market.
The September FOMC meeting did not result in an immediate interest rate hike, but it seems highly probable that there will be a December interest rate increase while balance reduction should start in October with further interest rates increases in 2018. Experience indicates that the Fed is getting ready to bring about a recession as soon as markets take the hint that the days of easy money and cheap credit are coming to an end.
It is a widely accepted postulate that excessive debt slows growth while lowering interest rates is a remedy applied to stimulate growth. The most recent US economic recovery has registered unusually slow growth in a low interest environment marked by a sharp increase in debt. The US national debt doubled in the course of the Obama administration over eight years. Deficit spending is thought to be a measure conducive to stimulating a sluggish economy. A combination of low interest rates and budget stimulus should have produced strong growth and not growth rates remaining under 2% for years on end.
Should the Fed continue with two more interest rate hikes in 2017, many commentators are of the opinion that the US will have a recession in 2018. The Fed`s intention to trim its balance sheet, if put into practice, will mean turmoil in the bond market as the Treasury will have to issue more bonds to cover the deficit of $670B with the national debt currently at $19.96T. The Fed will probably end up having to buy some of the new debt, thereby foiling its efforts at rebalancing its balance. October is at present the most likely month for a stock market correction or crash according to some observers.
Investors currently face great difficulty in trying to limit risk while desperately searching for higher yields. ZIRP and NIRP have made bonds uninteresting even as central banks continue buying up what is available on the market with the result that yields are kept artificially low. Central bank acquisitions on the stock market have pushed equity prices so high that new records have been set. David Stockman is correct in asserting that price discovery has been eliminated.
The Fed has invoked 2% as the magic number for inflation but claims that its goals have not been reached even though the economy is doing well and, therefore, interest rate hikes are justified. Inflation statistics depend on where one looks for inflation and the weighting given to different components. It is obvious that statistics can be manipulated and, unsurprisingly, consumer price inflation in the US is low, under 2%. Workers consequently do not have the argument of high inflation to justify requests for pay rises.
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