Market Awaits Retail Sales Data After Yesterday’s Fed Talk And Sell-off Over Interest Rate Hike

fED MINU.S. stock futures are pointing to a flat opening on Friday ahead of retail sales report for October and inflation report that will be released later in the day and give investors more data about the strength of the U.S. economy.

Yesterday U.S. stock indexes tumbled over 1 percent following some hawkish comments from a few Fed committee members about the likelihood of raising interest rates in December which remain near zero percent and haven’t increased since 2006.

The Fed has kept the primary federal funds interest rate at .025 percent since December 2008 during the height of the global recession to help revive economic growth and drive down borrowing costs.

One likely result of a tighter monetary policy includes the U.S. dollar strengthening further against other currencies which impacts import prices and in turn makes U.S. exports more expensive in the global market.

Yesterday U.S. Federal Reserve Vice President Stanley Fischer gave a speech in Washington D.C. and spoke about the effects of a strong dollar on U.S. activity and inflation.

Fischer pointed to the 15 percent rise in the U.S. dollar since July 2014 which he attributed to a number of factors, including an improving U.S. economy alongside weaker growth from major economies whose own currencies have been weakened due to loose monetary policies from their accommodative central banks.

“Because foreign central banks responded appropriately by providing additional monetary accommodation, foreign interest rates have declined relative to U.S. interest rates, encouraging investors to shift into dollar-denominated assets and in turn boosting the dollar ” Fischer said.

Fischer noted that another factor  behind the dollar’s strength concerns lower investor risk tolerance for the global outlook alongside a steady drop in oil and commodity prices.

“In recent months, investors have been particularly focused on the possibility of a sharp slowdown in China and other emerging market economies, with commodity exporters seen as particularly vulnerable in the wake of the dramatic drop in oil and non-oil commodity prices since the summer of 2014” Fischer continued.

Fischer believes that a strong U.S. dollar will continue to weigh down U.S. GDP growth into 2016.

“Looking forward, given that the effects of the stronger dollar play through gradually to the economy, there is good reason to expect that the drag on GDP growth from the stronger dollar will persist well into next year and likely spell continued weakness in the traded-goods-producing sectors of the economy that are especially exposed to the exchange rate” Fischer said.

Fischer admitted that the U.S. economy appears to be weathering the impact of a strong dollar and weaker global growth with the exception of their large effects on certain sectors of the economy heavily exposed to international trade.

Fischer explained that an accommodative U.S. monetary policy has served to support the economy and provide a favorable economic outcome for growth.

“Monetary policy has played a key role in achieving these outcomes through deferring liftoff relative to what was expected a little over a year ago” Fischer said.

Yesterday another U.S. Fed member gave a speech about U.S. monetary policy.

New York Federal Reserve Bank President and CEO William Dudley spoke before the Economic Club of New York and admitted from the onset that his decision to vote on raising interest rates is still dependent on the incoming data in the weeks ahead.

During his address, Dudley cited the strength of the U.S. dollar and the expected drag of the dollar on GDP growth in 2016.

“Judging from historical experience, the impact of the dollar’s recent strength has the potential to be protracted, so that the trade sector probably will continue to be a drag on growth in 2016” Dudley said.

Dudley acknowledged that the U.S. is closer to the Fed’s goal of maximum sustainable employment than at the start of the year and noted that housing prices are rising and the constraint on growth in residential investment now appears to be more on the supply side.

Dudley said that the international outlook looks less problematic than it did a year ago and pointed out that emerging market equity markets have recovered substantial ground and many countries’ currencies have stabilized.

“Although substantial questions remain about the Chinese growth outlook and the consequences of lower commodity prices for major commodity-exporting countries, we have seen two important positive developments.  First, the Chinese transition to a more balanced growth path appears to be underway—with stronger consumption and less emphasis on investment.  And the Chinese authorities have a range of tools available to support their economy during this transition” Dudley said.

Dudley sounded somewhat bullish about a December rate hike and monetary policy normalization but he continued to emphasize that the final decision will be data dependent.

“I think it is quite possible that the conditions the Committee has established to begin to normalize monetary policy could soon be satisfied”  Dudley said.

-Johnathan Schweitzer







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