Hawkish Rosengren acknowledges low inflation gives Fed flexibility

Hawkish Rosengren acknowledges low inflation gives Fed flexibility”

Posted: Sep. 26, 2017 8:00 am Updated: Sep.

Overseas, the United States dollar traded higher against a basket of currencies, which was underpinned by remarks from Federal Reserve Chair Janet Yellen on the need to continue with rate hikes. It has fallen more than 1.5 percent this week against a resurgent greenback. The market was barely changed after Yellen's speech. But she conceded that the Fed may need to adjust its assumptions.

Kevin Warsh, John Taylor, Glenn Hubbard and Jerome Powell are all possible candidates, but some have criticised the Fed's loose policies and advocate higher rates, which would not be Trump's preferred policy path. In addition, she said the Fed "should also be wary of moving too gradually", Bloomberg reported. But the Fed has said its rate hikes will depend on incoming data.

"A more important issue from a policy standpoint is that some key assumptions underlying the baseline outlook could be wrong in ways that imply that inflation will remain low for longer than now projected", says Yellen.

The buck rose to almost a 2-week high of USD1.3358 against the pound sterling Wednesday, but has since eased back to around USD1.34.

"The gradual approach means that, even if they are wrong on inflation it won't be a big mistake". In August, investors' expectations for a hike were just 38 percent.

Yellen has previously attributed the miss on inflation this year to temporary factors, including a price war among mobile phone companies.

Yellen said the messages from survey and market measures of inflation expectations are mixed. But the improving economy and the Fed shifting from accommodation to tightening has seen interest rates slowly tick higher.

Markets were put on notice by Federal Reserve Chair Janet Yellen who used a Tuesday speech to warn it would be "imprudent" to keep policy on hold until inflation is back to 2 percent.

Darden Restaurants slumped 5.60 per cent after the Olive Garden parent said it expected the negative effects on sales and earnings from Hurricane Irma to be about double that from Hurricane Harvey. The Fed's prior Houdini history of wiggling out of prior guidance to raise rates obviously is reason for skepticism, and this skepticism is clearly expressed in fed funds futures trading. Although a good deal of the upside has been EUR/USD related, it would appear that the Dollar has actually been in fine form pushing upwards against the JPY, EUR, and GBP as hopes of tax reform and a high chance of a December rate hike get priced in.

The mood was less upbeat elsewhere, with MSCI's broadest index of Asia-Pacific shares outside Japan off 0.1 percent at three-week lows following bellicose statements by Trump and North Korean leader Kim Jong Un. The euro fell to $1.1798 from $1.1846.

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