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Hawkish Federal Reserve minutes signal US rate rise next month

At the October meeting, most members thought conditions were close to being met

Ben Chu,Russell Lynch
Thursday 19 November 2015 02:26 GMT
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Speaking to a Senate committee hearing, the US Federal Reserve chief Janet Yellen warned of 'false dawns' for the American economy
Speaking to a Senate committee hearing, the US Federal Reserve chief Janet Yellen warned of 'false dawns' for the American economy

The first interest rate rise by the Federal Reserve since 2006 seemed to come closer after minutes from the American central bank’s October meeting suggested a majority of officials are rallying behind an increase in the cost of borrowing next month.

The minutes show that “most” participants thought that conditions for a rate rise “could well be met by the time of the next [December] meeting”. A strong jobs market report for October had already prompted traders to price in a December hike in rates from their historic 0.25 per cent floor and more piled into the trade on Wednesday.

The minutes played down the fear of financial contagion from overseas, which had helped to stay the Fed’s hand in September, saying that “the US financial system appeared to have weathered the turbulence in global financial markets without any sign of systemic stress”.

However, the Fed’s newest policymaker, Rob Kaplan, struck a more equivocal note in an interview, saying the central bank faces a “tricky situation” with a global slowdown.

“It probably has become a little bit of a psychological barrier out there where people are just waiting for it [a US rate hike] to happen,” Mr Kaplan said. While he stressed that was not a reason in itself to raise rates he argued it was something to be mindful of.

Meanwhile, the deputy governor of the Bank of England, Ben Broadbent, warned investors not to put too much faith in financial markets to predict when the Bank will finally raise Britain’s interest rates.

Mr Broadbent was speaking in the wake of the Bank’s latest inflation report, which showed inflation at 2 per cent in two years’ time – apparently endorsing market views that the first hike since 2007 would come in early 2017.

He said that this narrow approach was flawed, because it failed to account for other factors influencing the path of long-term interest rates – the so-called “yield curve” – such as global risks driving up demand for safer investments. Futures markets – currently fully pricing in a hike in December next year and a 50 per cent chance of a rise in August – took the speech as a hawkish hint.

The pound rose against the dollar, as the deputy governor argued that rate-setters should “look through” the temporary factors currently driving inflation into negative territory.

Mr Broadbent warned that “commentators often make very precise inferences from the Monetary Policy Committee’s projections” based on “the particular nugget” of its inflation forecast. But, he added, “One particular problem, when it comes to the so-called ‘lift-off’ date for interest rates, is that the yield curve is currently very flat. As a result, even relatively moderate changes in forward rates… can result in big shifts in the date at which the yield curve first reaches some particular level.

“But that doesn’t mean the MPC’s views about future policy have moved so dramatically.” The development of the economy through monthly surveys was a much-better guide to MPC action, Mr Broadbent added.

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