On Tuesday, Robert Kaplan, President of Dallas Federal Reserve anticipates resilient to the U.S. economy this 2016 but the nation’s central bank should start raising rates gradually and cautiously.
"We will ... power through, but there are issues over the horizon that have some downward impact on GDP, and will affect unemployment and inflation," Kaplan said.
Amid earlier Fed meeting, Kaplan mentioned to downgrade his expectations on hike path, expressing caution towards the impact from abroad.
Though the sluggish economy of China would have a controllable impact on the GDP growth of the U.S., the interconnectedness of global finance might cause the country to struggle as Beijing initiate rebalancing of its economy over consumption-led growth.
"Our bigger worry is as China goes through this very long transition, there will be periods where they have a devaluation or turmoil in terms of currency flight ... or turmoil in their markets," Kaplan said.
"I am more concerned that will transmit very quickly to global financial markets and cause credit spreads here to widen, cause a flight to quality ... and also ripple through our markets."
He remains confident as China has the tools in controlling transition, while some of their strategies are exceptional.
Subsequently, Jannet Yellen, Fed Chair supported Kaplan’s statement that the raising of rates should proceed “cautiously” given global risks.
Kaplan refrained from ruling out a rate hike at the Fed’s scheduled meeting on April 26-27
He said, "I would make the point generally, I think it is a good practice to assume that all eight Fed meetings are live,"
Earlier this week, the Fed lowered its forecast to two rate increase this 2016, down from four that was estimated at a meeting last December.
US Treasuries Surges on Rate Hike Caution
As the Federal Reserve chair signals cautious stance on interest rates, broad concerns arise over the central bank’s enthusiasm to tighten monetary policy this 2016 and start up a solid US Treasuries rally.
On Tuesday, Janet Yellen reaffirmed the need to “proceed cautiously” in increasing US interest rates, disputing hawkish comments of a few senior Fed officials earlier this week.
Policymakers of Fed like John Willams of the San Francisco Fed and Dennis Lockhart of the Atlanta Fed warned that the central bank might start raising interest rates this coming April, considering a resilience of the US economy, including the steady financial markets, which allows investors to remain on their toes.
The still-dovish stance of Yellen has boosted the 10-year Treasury yield on Tuesday into a three-week low of 1.81 per cent, while the two-year Treasury yield posted lower than 0.8 per cent, suggesting its firs lowest level since March.
A strategist at Wells Fargo Asset Management Brian Jacobsen said, “Yellen is looking through the noise instead of overreacting to it,”
“She views the risks to hiking soon as being asymmetric: There’s little danger to waiting to hike, so why risk it? The basic gist of her message seemed to be that not a lot has really changed over the last few months, making it too soon to tell whether another hike will be appropriate anytime soon,” he added.
As the rate hike anticipations remained unsure, the greenback slumped against all but one of its major rivals, and inflation settled at “break-evens”, a gauge of inflation forecasts. It resulted from comparing the yields of conventional, including inflation-proofed Treasuries, which posted a significant high level.
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