Ed’s Daily Notes for June 27th   Leave a comment

Bloomberg: Bullard Predicts Fed Rate Increase in First Quarter of 2015

Shhhh! Don’t let the markets hear this:

Federal Reserve Bank of St. Louis President James Bullard predicted the central bank will raise interest rates starting in the first quarter of 2015, sooner than most of his colleagues think, as unemployment falls and inflation quickens.

Asked about his forecast for the timing of the first interest-rate increase since 2006, he said: “I’ve left mine at the end of the first quarter of next year.”

“The Fed is closer to its goal than many people appreciate,” Bullard said today in an interview with Fox Business Network. “We’re really pretty close to normal.”

The Federal Open Market Committee is debating how long to keep the benchmark interest rate near zero after completing a bond-purchase program that’s set to end late this year. The committee repeated on June 18 that it expects the rate to remain near zero for a “considerable time” after the purchases end.

And when the Fed raises rates…

Bloomberg: World Bank Says Emerging-Market Calm May Turn Volatile

Developing economies enjoying “remarkably favorable” financing conditions in recent months remain susceptible to changes in investor sentiment that could crimp capital inflows, a World Bank report said.

“Current market conditions are supportive to developing-country prospects in the short term, but could encourage investors to underprice risk and borrowers to increase leverage,” the Washington-based lender said in a report today. “This might set the ground for sudden spikes in volatility and sharp adjustments to adverse news.”

Since March, long-term interest rates and market volatility declined to “unusually low levels,” narrowing bond spreads and putting downward pressure on borrowing costs, the report said. This triggered “a renewed search for yields which supported the demand for developing-country assets and currencies,” according to the report.

If long-term U.S. bond yields rise 100 basis points, or 1 percentage point, developing economies could experience a 50 percent drop in capital inflows, which would have “potentially destabilizing consequences” for some, the report said.

Ironically, the Federal Reserve itself may be the cause of the next economic black swan event.

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Posted June 27, 2014 by edmcgon in Economy, Federal Reserve, News

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