undergroundnewsroom.com March 23, 2018

Fed expects economic gains to prompt gradual rate increases

24 February 2018, 09:28 | Gordon Grant

By Hilary Russ

By Hilary Russ

Equity markets are wobbling as the outlook, according to experts, is for USA inflation to rise possibly a little faster than the Fed expects, which will likely see the central bank adjust and do some policy tightening.

Bond prices fell. The yield on the 10-year Treasury rose to 2.90 percent.

In its semiannual monetary policy report, the Fed signaled that it saw broad improvement in the USA economy and pointed to a pickup in inflation toward the end of past year, but didn't suggest that a rise in prices warranted more aggressive policy action (http://www.marketwatch.com/story/fed-on-track-for-3-rate-hikes-in-2018-but-4-no-sign-in-report-to-congress-2018-02-23).

The Dow Jones Industrial Average fell 254.63 points, or 1.01 per cent, to 24,964.75, the S&P 500 lost 15.96 points, or 0.58 per cent, to 2,716.26 and the Nasdaq Composite dropped 5.16 points, or 0.07 per cent, to 7,234.31.

It is still down more than 4% in February so far, however, after global equity markets were mauled at the start of the month by the concern that inflation is picking up.

USA stocks rose higher in early trade after a mixed finish on Thursday when the Dow Jones and S&P 500 closed up but the Nasdaq ended the day in the red.

The Fed's summary comes ahead of newly minted Fed Chairman Jerome Powell's testimony about the economy before Congress next week.

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"Right now Fed fund futures are pricing in three rate hikes with just under a 50-50 short of a fourth", said Matt Miskin, market strategist at John Hancock Investments. The Fed policy report appeared to echo that view.

The dip in yields helped boost bond proxy sectors such as utilities .SPLRCU , up 2.66 percent, and real estate .SPLRCR , up 1.72 percent.

By this he meant that raising interest rates does not have an immediate impact on the economy.

The dollar sagged broadly on Friday after its recovery this week faded as U.S. treasury yields declined from their recent peaks. However, if he fails to heed Milton Friedman's teaching that monetary policy operates with long and variable lags, we should brace ourselves for a prolonged period of very unsettled financial markets. "That would probably be positive for the dollar", Gittler said.

Blue Buffalo Pet Products Inc (NASDAQ:BUFF), saw its share lift 16.91% at US$39.89 after it agreed to be taken over by General Mills Inc (NYSE:GIS) for US$40 per share in cash, or a total of US$8bn.

Hewlett-Packard Enterprises Co.(HPE) shares jumped about 10% after the enterprise-focused tech group reporting a strong fiscal first quarter. It shed about 1.4 percent this week, its biggest weekly decline since early December. It also came before a very inflationary and stimulative budget deal in Congress that is expected to push the annual deficit past the $1 trillion threshold soon. The company's shares were down 0.5%.

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