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Published On: Thu, Oct 9th, 2014

The Fed indicate dollar firmness and global economic slowdown as threats to US recovery

The Federal Reserve minutes released on Wednesday show central bankers’ anxiety about the strong US dollar and the global economic slowdown.

The Federal Reserve minutes released on Wednesday show central bankers’ anxiety about the strong US dollar and the global economic slowdown.

The minutes released of the Federal Reserve’s last policy meeting, held September 16 to 17, indicate there are two looming threats to their intention to tie interest rate hikes to US economic progress: the stronger US dollar and the decelerating global economy. The rising USD could slow down the much needed inflation rebound. On the other hand, the economic turmoil observed in Europe and Asia gives another reason for the Fed to stick to policy accommodation for the immediate future.

Investors responded to the message by bidding up US stocks and bonds, betting there was no rush by the Fed to tighten monetary policy. The greenback slumped to a two-week low as a result.

The central bankers’ debate on the matter of more “data-dependent” policy guidance was intense .Some policymakers were worried about the current guidance of rates staying on record lows for a long time. Others claimed a change would have an adverse impact on financial markets, and the economy would suffer owing to higher borrowing costs. The minutes pointed out the matter should be handled cautiously, so as to send no unintended signals regarding the Fed’s policy outlook. It can be expected the next Fed statement on October 28-29 would bring some more information on the timing and pace of rate hikes.

On the last Fed meeting concern has been expressed by some policymakers that the strengthening US dollar could adversely impact the economy, and thus the longer term inflation expectations would move slightly lower. Though the jobless rate dropped in September to 5.9 percent, some easing was observed in inflation. In the meanwhile, on Tuesday the IMF shrunk its forecasts of global economic growth.

According to the Fed central bankers, substantial risks stem from the euro zone growth and the deflation threat looming in the common currency area. Others pointed the sluggish activity in Japan and China and unexpected developments in the Middle East and Ukraine as significant risk factors.

Investors’ response was to bet on a later start for the tightening cycle. On Wednesday, the US short-term interest rate futures indicated traders gave under 50 percent chance of a rate hike in July 2015. Economists are expecting increase in borrowing costs around mid 2015, but central bankers have hinted on a more aggressive tightening compared to expectations by the private sector. The Federal Reserve acknowledged the market was behind in that respect and pointed that could lead to complications when the time for a rate hike comes.

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