3 December 2018
Bassanese Bites: The Next Big Test – Week beginning: 03 December 2018
It was a huge (positive) week for global financial markets, thanks to a dovish tilt from the US Federal Reserve and an easing in US-China trade tensions. Equities rose and bond yields fell, while the $A strengthened despite a slump in iron-ore prices.
The biggest jolt to markets came from a speech from US Fed Chair Jerome Powell who validated recent dovish sentiment from other Fed members by arguing that the Fed funds rate was “just below the broad range of estimates” of the neutral policy rate. Given this broad range (according to long-run Fed funds forecasts by voting Fed members) is from 2.5% to 3.5%, and the Funds rate is currently 2.25%, Powell in effect just stated the obvious. But in terms of emphasis, it marks a big shift from what he indicated back in early October – which helped send markets into their recent tailspin – when he said “we may go past neutral, but we’re a long way from neutral at this point, probably.” Although a rate rise later this month still seems locked in, there’s now the tantalising prospect that the Fed could pause its rate hike agenda as early as the new year. The market, at least, is now pricing only one rate rise for 2019.
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