RateHub co-founder warns against impact of US Fed rate hike

Janet Yellen chair of the U.S. Federal Reserve adjusts her glasses during a meeting of the Board of Governors of the Federal Reserve in Washington D.C. U.S. on Tuesday

Janet Yellen chair of the U.S. Federal Reserve adjusts her glasses during a meeting of the Board of Governors of the Federal Reserve in Washington D.C. U.S. on Tuesday

"They do not have as much room to be patient as they did before", said Tim Duy, an economics professor at the University of OR, who expects Fed policymakers to lift their rate forecasts this week.

The Fed is betting businesses will shrug off the extra cost of borrowing, continue to invest in the USA economy and create jobs.

If anything, market analysts, economists, and Federal Reserve officials tout the possibility of stronger economic growth, resulting from the possible impact of United States tax cuts and infrastructure spending, or the run-up in household wealth from rising stock and real estate values.

Bond-market investors won't be taken by surprise when the Fed raises on Wednesday because it has telegraphed its next rate move effectively.

Now? The Fed seems all but sure to raise rates Wednesday for the third time in 15 months and to signal more hikes probably coming. The unemployment rate held roughly steady at 4.7 per cent. A rate hike is a sign that the USA economy is improving.

Eric Lascelles, chief economist at RBC Global Asset Management, said: "A further Fed rate hike at the FOMC meeting is practically pre-ordained". Trump has called for higher rates, but Yellen cannot take a positive presidential reaction for granted.

In economic news, wholesale inflation data solidified expectations of a USA interest rate hike tomorrow.

There are signs of more inflation globally, the dollar is pushing down less on US prices, domestic inflation expectations have picked up and Friday's closely watched monthly jobs report showed wages rising 2.8 percent year-on-year in February, with payrolls rising a sturdy 235,000.

The Organization of the Petroleum Exporting Countries, which has reduced output even more than it had pledged past year, also said in its monthly report that USA shale output and other non-OPEC supply was increasing. Each policymaker offers his or her own anonymous forecast.

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The Fed is expected to raise rates again even though its preferred measure of inflation - personal consumption expenditures - trails its 2% target.

But the overall yield curve, the range of interest rates from short to long term debt maturities, showed little sign investors thought the Fed was becoming anxious about inflation.

The economy already appears closer to its goals than the Fed had expected in December, the last time it released forecasts.

However, if the Fed starts raising rates faster than expected later this year, the stock market's glory ride could hit some bumps as borrowing costs rise and throw a wet blanket on corporate spending plans.

Marketwatch.com pointed out that the number of people who said they could not work last month because of bad weather was 157,000, the lowest level for February since 2002. Of course, the unintended outcome of providing the highest government guaranteed risk-free rate in the country to banks is that there is less incentive for them to take a risk on loans. New rate forecasts and projections would also be discussed in the March meeting. Financial markets will immediately move to anticipate the next Fed move based on the message that accompanies the rate increase.

It'll be interesting to hear what Fed chair Janet Yellen has to say in her press conference to accompany the decision.

In addition to holding down the interest rate, the Fed also engaged in several rounds of what is known as "quantitative easing" (QE) following the onset of the financial crisis.

"Rising rates are good for stocks because the Fed is more confident in the economy?"

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