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FOMC US interest rates


Jan 8 2015, 9.38am GMT


As deflation is declared in Europe and the DollarIndex hits 9-year highs, the FED releases bearish statements.

The Federal Open Market Committee minutes for December, released on Wednesday, state that, “economic activity is expanding at a moderate pace.” The Committee cites the labour market, job gains and household spending as positive though the housing sector is still in slow growth.

The FOMC statement on inflation, which has been running below the FED’s 2% goal for more than two years, reflects global energy price reductions, in particular the price of oil as it reaches 5.5 year lows and went under the $50 mark this week. The minutes state, “Market-based measures of inflation compensation have declined somewhat further; survey-based measures of longer-term inflation expectations have remained stable.”

The main goals set out by the FED are full employment and a slow rise in inflation to 2%. The minutes noted that the effects of low energy prices would ‘dissipate’. Being in a position of strength with US shale output rising, less dependence on imported energy and a strong currency allowing cheaper imports, means that the FED’s expectations of raising inflation as the labour market improves, may happen in 2015. In the meantime, the minutes stated, “the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.”

The bearish nature of the statement was supported significantly by chair Janet Yellen, but a more robust view towards normalizing monetary policy was also proffered by 3 members of the Committee as they pointed out the better-than-expected improvement in the US economy.

As Bonds relate their growth and inflation levels in the relevant economy, the long term US bonds are feeling the effects of the sustained low interest rate. This week, the yield on the US30year Treasury bond went down to 2.47%, as the FT reported, “just adrift of the 2.44 per cent record low seen in July 2012.”

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