Fed’s slipped up by delaying rate hikes. Here’s why

The U.S. Federal Reserve has made a "policy mistake" by holding back further rate hikes in 2016 as the U.S. economy is growing strongly and a hawkish monetary policy is therefore needed, according to a report by London-based ETF Securities.
The Fed passed on raising its interest rate target at its March meeting this year citing global economic and financial situation as a risk. Policymakers had previously signaled in December that four rate rises were likely in 2016.
However, the report from ETF securities suggests the lack of hike in March was an error in judgment from the US policymakers. It seems like the Fed's board of governors has become more dovish since the December meeting and the market is now pricing in only one rate hike by the end of the year.
ETF Securities, however, believes the Fed has slipped up.
"Real GDP (gross domestic product) trends indicate that the pace of U.S. economic growth is solid. While the growth path of real GDP is not as strong as pre-crisis levels, there is no evidence of a slowdown. Such a growth path warrants tighter monetary policy," ETF securities said in a statement.

ETF Securities' stance is, however, contrary to what a number of economists believe. Official data shows the U.S. economic growth slowed to 1.4 per cent in the fourth quarter of 2015, down from 2 per cent in the third quarter of 2015. A number of banks have already revised their outlook for the year due to factors such as global economic uncertainties.
Citigroup, for example, recently downgraded its outlook for the U.S. for 2016-2017, saying the risks were very evident. The revised figures show that the GDP will grow by 0.9 percent in the first quarter and 1.7 percent for the year. "Despite such tepid growth prospects, we project a slow decline in the unemployment rate to 4.7 percent by end-2016, and 4.5 percent by end-2017," William Lee, head of North America economics at Citigroup said in his research outlook. He predicted inflation to remain subdued.
However, James Butterfill, head of research and investment strategy at ETF Securities says while the Fed is currently stuck in a liquidity trap, the U.S. economy is strong to sustain another rate hike.
"Looking at the key factors that have historically defined rates hikes, namely the non-accelerating inflation rate of unemployment (NAIRU), wage growth and nonfarm payrolls, all suggest a rate hike should occur. Delaying hikes will likely have a much more negative impact on asset classes and the global economy," Butterfill told CNBC
He further explains that current real GDP has recovered and the quarterly dip in the figures is very common during rate hike periods.
"Investors and industry leaders become very concerned with the impact that the first rate hike will have on the economy – a short term negative fund. This in turn leads to lower corporate confidence and consumer confidence, leading to a temporary dip in GDP growth, this is history repeating itself."


The report also says that currency volatility remains elevated as investors continue to worry over the potential for rate hikes derailing the U.S. economic recovery. However, the ETF Securities report says there is no danger of modest rate hikes impacting economic growth with the threat actually coming from uncertain policy guidance from the Fed.
"Such a situation seems circular, with markets fretting over Fed decisions and the Fed concerning themselves with market volatility – an issue outside the scope of its mandate," the report says, predicting that the U.S. recovery will continue in 2016.
The minutes of the March meeting highlighted the consensus within the Fed around a cautious outlook for the economy.
"If the Fed's global concerns diminish in the near term, their worries about the U.S. economy should also lessen," David Kelly, chief global strategist at JP Morgan Asset Management told CNBC via email. "The U.S. economy, like the global economy, faces challenges ranging from a very volatile and unpredictable race for president to uncertainty about the strength of any potential bounce-back in corporate earnings. Moreover, equity valuations look close to fair value rather than cheap in absolute terms. "

This is what could create some turbulence Friday

  Fed officials from different camps speak ahead of Friday's Wall Street open, and they could make some waves in already seasick markets.

Market nerves are starting to get a little frayed right now. You can see it in the risk markets  there's potential (for market impact). What's been interesting to me is you've had a parade of Fed officials some of whom are extremely dovish, and they've been a whole lot less pessimistic and a lot less dovish than (Fed Chair) Janet Yellen, since the last meeting."

Speaking on Friday is New York Fed President William Dudley, who is seen as closely aligned with Yellen — in the dove camp. He speaks at 8:30 a.m. EDT on the regional and national economy in Connecticut. Philadelphia Fed President Patrick Harker gives remarks at an investment conference in Camden, New Jersey, at 9 a.m. EDT, and he has recently called for the central bank to get on with rate hikes. Dallas Fed President Rob Kaplan speaks later on the political economy of Texas and Mexico at 9:30 a.m. EDT.

Unfortunately they seem in muddled message mode right now,. Markets will also digest the comments of more hawkish Kansas City Fed President Esther George, who was to speak Thursday evening. George is the one member who dissented at the last central bank meeting, when it voted to keep rates unchanged.

There will also be comments to consider from Yellen herself, plus her last three predecessors, at an unprecedented panel discussion Thursday evening. 

Yellen said Thursday that the U.S. economy is strong and said it is not a bubble economy. She reiterated that the Fed is taking a cautious approach on raising rates and said the Fed's rate hike in December was not a mistake.

Her comments Thursday evening were viewed as more optimistic than in her appearance last week, and they helped support risk markets, including oil. Now the question is which way will the next speakers lean

·                                 

Brexit: GBP COULD FALL A FURTHER 15-20% vs USD

A Brexit vote could lead investors to worry about the UK’s ‘twin deficits’. To date, these have largely been ignored by the FX market. Brexit could raise concerns and Mark Carney, the BoE Governor, recently warned that Brexit could leave the UK reliant on “the kindness of strangers” in an environment of global economic volatility.

Already a gap has opened up between the observed level of sterling and the level implied by interest rate differentials. If the currency market is pricing in around a 33% probability of a Brexit vote, GBP-USD could fall by around another 15-20% should a Brexit vote occur (i.e. if the probability shifted from 33% to 100%). This would see GBP-USD falling to levels not witnessed since the early 1980s. We also think that the GBP would come under pressure against the EUR. Indeed, EUR-GBP could move towards parity in the aftermath of a Brexit vote.”

WELCOME BACK

Hello dear,It is my sincere pleasure to welcome you back to our darling blog website,doing what we always enjoy .My sincere apologies for the long absence, I know readers and well wishers would have missed my post a great deal.As  Business Entrepreneur,I have been busy working on some vital projects,but notwithstanding my love,determination and doggedness trading the capital market,sharing and networking,remains unwavered and I am absolutely committed to contributing my own quota in trading experience geared towards making consistent profits and at the same time reducing flaws to the barest minimum.

I strongly believe nothing is impossible to the mind that is ready to take the desired action,and you can achieve anything you want to be in life as far as trading is concern ,we will definitely all get to our various destinations and even surpassing our dreams,visions,and aspirations.The sky is just the starting point.See you on top,enjoy reading…..