While fED Prepares Rate Hike, Inflation Expectations Remain Subdued

Friday’s jobs report might have given FED hawks some ammunition to fight off the doves and consider rate hike as early as September this year.

• Despite so market based measure of inflation expectations show that participants are not so confident over inflation though it can be said that deflationary pressure have subsided. 10 year break even inflation is at 1.86%, still below 1.94%, made on May 5.

Why FED is considering a rate hike with low inflation?

• Some FED officials are worried that with rates close to zero percent FED might fall too far behind the curve and have to move faster later on and they would like to reduce the gap between current inflation which stands around 1.7% y/y and Federal funds rate.

• FED hasn’t hiked rates since 2006, so it is not clear what effects it might have once it does with large balance sheet. According to the hawks, interest rates at 0.25-0.5% is still very low compared to historical standards.

FED officials would like to hike at the earliest so that there could be considerable time gap remains between the two cuts and rate hike impact on the economic activities can be measured and studied.

FED is to announce monetary policy in June 17^th. As of now September remains likely date for first rate hike, though June can’t be completely ruled out.

The material has been provided by InstaForex Company – www.instaforex.com

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