The Reserve Bank board will leave Australian interest rates on hold when it meets tomorrow, the European Central Bank will do likewise on Thursday night, but it now looks almost certain that the US Federal Reserve will lift rates at the end of its two day meeting next week.
That was after a blunt warning from Fed chair, Janet Yellen in a speech in the US on Friday night in which she all but confirmed an increase was imminent (and could very well continue for another two years or more).
"In short, we currently judge that it will be appropriate to gradually increase the federal funds rate if the economic data continue to come in about as we expect. Indeed, at our meeting later this month, the Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate. Yellen said her speech (https://www.federalreserve.gov/newsevents/speech/yellen20170303a.htm).
“In light of current economic conditions, such an increase would be consistent with the Committee’s expectation that it will raise the target range for the federal funds rate at a gradual pace and would bring the real federal funds rate close to some estimates of its current neutral level.
“However, partly because my colleagues and I expect the neutral real federal funds rate to rise somewhat over the longer run, we projected additional gradual rate hikes in 2018 and 2019,” Ms Yellen said.
She added that “unless unanticipated developments adversely affect the economic outlook, the process of scaling back (monetary) accommodation likely will not be as slow as it was during the past couple of years.
This is similar to language the Fed has used in the past to signal an impending move. The only thing in the way of a rate hike is the the US February jobs report, due this Friday night.
Adding to the belief a rate rise is about to happen, Yellen’s deputy, Stanley Fischer said that, “If there has been a conscious effort, I am about to join it.”
The comments from the duo follow three other speeches from senior Fed officials last week which made clear that the pressure is growing for a rate rise on March 15.
The most important of the trio was the one from New York Fed head, Bill Dudley who said last Tuesday that the case for a March move had become “a lot more compelling.”
The timing of a rate increase will coincide with the release of new economic forecasts from the central bank, and the usual quarterly media conference by Ms Yellen.
The comments from Ms Yellen and Mr Fischer had little impact on the markets and Wall Street closed with a small gain after being in the red, but gold fell, and oil edged up on demand.
Investors now see the odds of a March rate hike at 75%, up from 22% last week and 55% midweek.
On Thursday night the ECB is expected to leave rates unchanged. The central bank will release an updated set of staff economic forecasts, which are likely to see an upward revision to inflation estimates and possibly growth.
Meanwhile the rebound in GDP in the 4th quarter of 2016 will not see the RBA lift rates, but it will remain on hold and make clear (again) it will remain in that position for most if not all of this year.
The only worries are rising property prices in Sydney and Melbourne and the growing level of household debt – those concerns are likely to be tackled by prudential means, not monetary policy (rate rises) or fiscal shifts (in the Federal Budget such as removing negative gearing or the capital gains discount).
The AMP’s chief economist, Dr Shane Oliver believes “we now expect the RBA to leave rates on hold for the rest of the year."
“Another rate cut is still possible but it would require another leg down in inflation to get the RBA to cut again,” he wrote at the weekend.
