Federal Reserve

Yellen led Federal Reserve will raise interest rates, but very gradually

yellen_janet_040512_8x10
Up until now every time the Federal Open Market Committee has had a meeting, I have maintained that Janet Yellen, the Chairperson of the Federal Reserve of the United States, will not raise interest rates. The latest meeting of the FOMC is currently on (December 15-16, 2015) and I feel that in all probability Janet Yellen and the FOMC will raise the federal funds rate at the end of this meeting.

The federal funds rate is the interest rate at which one bank lends funds maintained at the Federal Reserve to another bank on an overnight basis. It acts as a sort of a benchmark for the interest rates that banks charge on their short and medium term loans.

So why do I think that the Yellen led FOMC will raise the interest rate now? Two major economic indicators that the FOMC looks at are unemployment and inflation. Price stability and maximum employment is the dual mandate of the Federal Reserve.

There are various ways in which the bureau of labour standards in the United States measures unemployment. This ranges from U1 to U6. The official rate of unemployment is U3, which is the proportion of the civilian labour force that is unemployed but actively seeking employment.
U6 is the broadest definition of unemployment and includes work­ers who want to work full-time but are working part-time because there are no full-time jobs available. It also includes “discouraged workers,” or people who have stopped looking for work because the economic conditions the way they are make them believe that no work is available for them.

U6 touched a high of 17.2 percent in October 2009, when U3, which is the official unemployment rate, was at 10 percent. Nevertheless, things have improved since then. In October and November 2015, the U3 rate of unemployment stood at 5% of the civilian labour force. The U6 rate of unemployment stood at 9.8% and 9.9% respectively. This is a good improvement since October 2009, six years earlier.

In fact, the gap between U3 and the U6 rate of unemployment has narrowed down considerably. As John Mauldin writes in a research note titled Crime in the Job Report with respect to the unemployment figures of October 2015: “The gap between the two measures [i.e. U3 and U6] is now the smallest in more than seven years, a sign that slack in the labour market is diminishing. And as the Fed weighs a potential rate hike, what may be more important is the number of people working part-time who would prefer to work full-time – that number posted its biggest two-month decline since 1994. Janet Yellen has referred to this number as often as she has to any other specific number. It is on her radar screen.”

In fact, Janet Yellen seems to be feeling reasonably comfortable about the employment numbers. As she said in a speech dated December 2, 2015: “The unemployment rate, which peaked at 10 percent in October 2009, declined to 5 percent in October of this year…The economy has created about 13 million jobs since the low point for employment in early 2010.”

Another indicator that has improved is the number of people who want to work full time but can’t because there are no jobs going around. As Yellen said: “Another margin of labour market slack not reflected in the unemployment rate consists of individuals who report that they are working part time but would prefer a full-time job and cannot find one–those classified as “part time for economic reasons.” The share of such workers jumped from 3 percent of total employment prior to the Great Recession to around 6-1/2 percent by 2010. Since then, however, the share of these part time workers has fallen considerably and now is less than 4 percent of those employed.”

On the flip side what most economists and analysts don’t like to talk about is the fact that the labour force participation rate in the United States has fallen. In November 2015 it stood at 62.5%, against 62.9% a year earlier. It had stood at 66% in September 2008, when the financial crisis started.
Labour force participation rate is essentially the proportion of population which is economically active. A drop in the rate essentially means that over the years Americans have simply dropped out of the workforce having not been able to find a job. Hence, they are not measured in total number of unemployed people and the unemployment numbers improve to that extent.

This negative data point notwithstanding things are looking up a bit. With the U3 unemployment rate down to 5% and U6 down to less than 10%, companies, “in order to entice additional workers, businesses may have to think about paying more money,” writes Mauldin.

And this means wage inflation or the rate at which wages rise, is likely to go up in the days to come. The wage inflation will push up general inflation as well as buoyed by an increase in salaries people are likely buy more goods and services, push up demand and thus push up prices. At least that is how it should play out theoretically.

As Yellen said in a speech earlier this month: “Less progress has been made on the second leg of our dual mandate–price stability–as inflation continues to run below the FOMC’s longer-run objective of 2 percent. Overall consumer price inflation–as measured by the change in the price index for personal consumption expenditures–was only 1/4 percent over the 12 months ending in October.”

But a major reason for low inflation has been a rapid fall in the price of oil over the last one year. How does the inflation number look minus food and energy prices? As Yellen said: “Because food and energy prices are volatile, it is often helpful to look at inflation excluding those two categories–known as core inflation…But core inflation–which ran at 1-1/4 percent over the 12 months ending in October–is also well below our 2 percent objective, partly reflecting the appreciation of the U.S. dollar. The stronger dollar has pushed down the prices of imported goods, placing temporary downward pressure on core inflation.”

In fact, the fall in the price of oil has also brought down the fuel and energy costs of businesses. This has led to a fall in the prices of non-energy items as well. “Taking account of these effects, which may be holding down core inflation by around 1/4 to 1/2 percentage point, it appears that the underlying rate of inflation in the United States has been running in the vicinity of 1-1/2 to 1-3/4 percent,” said Yellen.

In fact, a careful reading of the speech that Yellen made on December 2, clearly tells us that she was setting the ground for raising the federal funds rate when the FOMC met later in the month.

On December 3, 2015, Yellen made a testimony to the Joint Economic Committee of the US Congress. In this testimony she exactly repeated something that she had said a day earlier in the speech. As she said: “That initial rate increase would reflect the Committee’s judgment, based on a range of indicators, that the economy would continue to grow at a pace sufficient to generate further labour market improvement and a return of inflation to 2 percent, even after the reduction in policy accommodation. As I have already noted, I currently judge that U.S. economic growth is likely to be sufficient over the next year or two to result in further improvement in the labour market. Ongoing gains in the labour market, coupled with my judgment that longer-term inflation expectations remain reasonably well anchored, serve to bolster my confidence in a return of inflation to 2 percent as the disinflationary effects of declines in energy and import prices wane.”

This is the closest that a Federal Reserve Chairperson or for that matter any central governor, can come to saying that he or she is ready to raise interest rates. My bet is that the Yellen led FOMC will raise rates at the end of the meeting which is currently on.

Nevertheless, this increase in the federal funds rate will be sugar coated and Yellen is likely to make it very clear that the rate will be raised at a very slow pace. This is primarily because the American economy is still not out of the woods.

The economic recovery remains fragile and heavily dependent on low interest rates. Net exports (exports minus imports) remain weak due to a stronger dollar. Yellen feels that this has subtracted nearly half a percentage point from growth this year.

In this environment economic growth in the United States will be heavily dependent on consumer spending, which in turn will depend on how low interest rates continue to remain. As Yellen said in her recent speech: “Household spending growth has been particularly solid in 2015, with purchases of new motor vehicles especially strong….Increases in home values and stock market prices in recent years, along with reductions in debt, have pushed up the net worth of households, which also supports consumer spending. Finally, interest rates for borrowers remain low, due in part to the FOMC’s accommodative monetary policy, and these low rates appear to have been especially relevant for consumers considering the purchase of durable good.”

This again is a clear indication of the fact that the federal funds rate in particular and interest rates in general will continue to remain low in the years to come.

As Yellen had said in a speech she made in March earlier this year: “However, if conditions do evolve in the manner that most of my FOMC colleagues and I anticipate, I would expect the level of the federal funds rate to be normalized only gradually, reflecting the gradual diminution of headwinds from the financial crisis.”

I expect her to make a statement along similar lines either as a part of the FOMC statement or in the press conference that follows or both.

(The column originally appeared on The Daily Reckoning on December 16, 2015)

Here’s the real reason why US Federal Reserve did not raise interest rates

yellen_janet_040512_8x10
The Federal Open Market Committee (FOMC) of the Federal Reserve of the United States, the American central bank, has decided to stay put and not raise the federal funds rate for the time being, as it has for a very long time now.

The federal funds rate is the interest rate at which one bank lends funds maintained at the Federal Reserve to another bank on an overnight basis. It acts as a sort of a benchmark for the interest rates that banks charge on their short and medium term loans.

The market was split down the middle on what they expected the Federal Reserve to do. The Federal Reserve has maintained the federal funds rate in the range of zero to 0.25% in the aftermath of the financial crisis which started in September 2008. This has been done in the hope of supporting an American economic recovery.

One view was that the Federal Reserve should start raising the federal funds rate now and get done with it. The other view was that the American economy is still in a fragile state and hence, the federal funds rate should not be raised. Also, any increase in the federal funds rate would have a bad impact on financial and asset markets all over the world, this school of thought held. And that couldn’t possibly be good for the American economy.

The FOMC led by the Federal Reserve Chairperson Janet Yellen chose to go with the latter view.  There are several reasons for the same.
The unemployment rate in the United States fell to 5.1% of the civilian labour force in August 2015. Nonetheless, this number does not take into account those who are working part-time even though they want to work full time. It also does not take into account those who want to work but haven’t actively searched for a job recently.

In fact, the number to look at is the labour force participation ratio. The World Bank defines this as: “the proportion of the population ages 15 and older that is economically active: all people who supply labour for the production of goods and services during a specified period.”

The number had stood at 66% in January 2008 before the start of the financial crisis. As of August 2015 it stands at 62.6%. In August 2014 the number was at 62.9%. Hence, the labour force participation ratio has fallen over the last one year, despite the unemployment rate going down. This means that people have been dropping out of the workforce as they get discouraged at not finding a job and then stop looking for it.

Further, the Federal Reserve has been aiming for an inflation of 2%. As yesterday’s FOMC statement said: “the Committee expects inflation to rise gradually toward 2 percent over the medium term.”

The measure of inflation that the Federal Reserve likes to look at is the core personal consumption expenditure (PCE) deflator. The core PCE deflator is at 1.24%, which is nowhere near 2% that the Federal Reserve is aiming for. A stronger dollar which has made imports into America cheaper as well as lower oil prices are the major reasons for the same.

Interestingly, the FOMC in its statement yesterday said: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” This is the first time this line has made it into the FOMC statement.

What does it mean by this? As Yellen said in a press conference that followed the release of the FOMC statement: “The outlook abroad appears to have become more uncertain of late. And…heightened concerns about growth in China and other emerging market economies have led to volatility in financial markets.”

In the press conference that nobody asked Yellen about what did she really mean by this. Chinese economic growth has been slowing down. Many analysts have argued that China is not growing at the 7% growth rate that it claims to be.

In this scenario it is likely that China might devalue the yuan against the dollar further in order to push up its exports. If China devalues the yuan, Chinese exports will become more competitive as Chinese exporters are likely to cut prices. In this scenario the value of imports coming into the United States will fall further, as exporters from other countries will also have to cut prices in order to compete with the Chinese. This will mean inflation falling further. In my opinion, this is what Yellen and the FOMC really meant.

In the press conference Yellen said that she expects that the FOMC will raise the federal funds rate before the end of this year. The direction in which the Chinese economic growth will unravel is unlikely to become clear so soon.

What this means is that the era of easy money unleashed by the Federal Reserve in late 2008, is likely to continue in the months to come. The Federal Reserve is unlikely to raise the federal funds rate this year. Not surprisingly the stock market in India is having a good day, with the BSE Sensex having rallied by more 470 points or 1.8%, as I write this.

Also, now that the FOMC hasn’t raised interest rates, calls for the RBI governor Raghuram Rajan to cut the repo rate are going to get louder.

The column originally appeared on Firstpost on Sep 18, 2015

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Coming up: The $9 trillion problem of global finance

3D chrome Dollar symbolThat global finance has been in a mess since the start of the global financial crisis in September 2008, is old news now. But the fact that a bigger mess might be awaiting it, should still make for news.
A January 2015 research paper titled Global dollar credit: links to US monetary policy and leverage authored by Robert N McCauley, Patrick McGuire and Vladyslav Sushko who belong to the Monetary and Economic Department at the Bank for International Settlements (BIS), has been doing the rounds in the recent past.
As per this paper : “Since the global financial crisis, banks and bond investors have increased the outstanding US dollar credit to non-bank borrowers outside the United States from $6 trillion to $9 trillion.” In 2000, the number had stood at $2 trillion.
What this clearly tells us is that over the years there has been a huge jump in the total amount of borrowing that has happened in dollars, outside the United States. Hence, more and more foreigners(to the United States) have been borrowing in dollars.
A similar trend has not be seen in case of other major currencies like the euro and the yen. In case of the euro the number stands at $2.5 trillion. For the yen, the number is at just $0.6 trillion. “Moreover, euro credit is quite concentrated in the euro area’s neighbours,” the BIS report points out. Hence, a major part of the world continues to borrow in dollars.
The question is which countries have borrowed all this money that has been lent? As the BIS report points out: “Dollar credit to Brazilian, Chinese and Indian borrowers has grown rapidly since the global financial crisis…Dollar borrowing has reached more than $300 billion in Brazil, $1.1 trillion in China, and $125 billion in India. The rapid growth of bonds relative to loans is more evident in Brazil and India than in China.”
This is happening primarily because domestic interest rates in these countries are on the higher side in comparison to the interest rates being charged on borrowing in dollars. Further, in the aftermath of the financial crisis, the Federal Reserve of the United States, initiated a huge money printing programme and at the same time decided to maintain the federal funds rate between 0-0.25%. This led to more and more borrowers deciding to borrow in US dollars.
“A low level of the federal funds rate…is associated with higher growth of dollar loans to borrowers outside the US…A 1 percentage point widening in a country’s policy rate relative to the federal funds rate is, on average, associated with 0.03% more dollar bank loans relative to GDP in the following quarter ,” the BIS paper points out. And that explains the rapid expansion of dollar loans.
The federal funds rate is the interest rate at which one bank lends funds maintained at the Federal Reserve to another bank on an overnight basis. It acts as a sort of a benchmark for the interest rates that banks charge on their short and medium term loans.
Interestingly, countries which are referred to as emerging market countries have borrowed close to $4.5 trillion of the total $9 trillion. “The emerging market share – mostly Asian – has doubled to $4.5 trillion since the Lehman crisis, including camouflaged lending through banks registered in London, Zurich or the Cayman Islands,” points out Ambrose Evans-Pritchard in a recent piece in The Telegraph.
So what are the implications of this? First and foremost the world is now more closely connected to the monetary policy practised by the Federal Reserve of the United States. As the BIS paper points out: “Changes in the short-term policy rate are promptly reflected in the cost of $5 trillion in US dollar bank loans.” What this basically means is that if the Federal Reserve chooses to raise the federal funds rate any time in the future, the interest that needs to be paid on the dollar debt will also go up. And with the huge amount of money that has been borrowed, this could precipitate the next level of the crisis, if the borrowers are unable to pay up on the higher interest. One of the dangers that can arise is “if borrowers need to substitute domestic debt for dollar debt in adverse circumstances, then the exchange rate would come under pressure.”
There are other risks as well that need to be highlighted. There is a growing concern that companies in emerging markets have borrowed in dollars to essentially fund carry trades, where they are borrowing in dollars at low interest rates and then lending out that money at higher interest rates in their own country. Hence, nothing constructive is happening with the money that is being borrowed. It is simply being used for speculation.
Many of the companies borrowing in dollars are essentially borrowing for the first time in dollars. And this leads to the question whether the lenders have carried out an adequate amount of due diligence. Further, some of this borrowing may not have been captured in domestic debt statistics of countries. This means that countries may have actually borrowed more than their numbers suggest. Hence, when the time comes to repay this can put pressure on foreign exchange reserves. Lastly, with firms borrowing in dollars, the domestic policy-makers like central banks and finance ministries, may be misled “by the slower pace of domestic bank credit expansion”. This could mean lower interest rates when they should actually be raised. Lower interest rates can lead to more asset bubbles in financial markets.
What is not helping the cause is the fact that the dollar has appreciated rapidly against other major currencies. It has appreciated by around 25% since June 2014 against other major currencies. This means in order to repay the dollar loans or even to pay interest on it, the borrowers need a greater amount of local currency to buy dollars.
To conclude, it is worth repeating what I often say: before things get better, they might just get worse. Keep watching.

(Vivek Kaul is the author of Easy Money. He tweets @kaul_vivek)

The column originally appeared on Firstpost on Mar 25, 2015 

Janet Yellen’s excuses for not raising interest rates will keep coming

yellen_janet_040512_8x10
The Federal Open Market Committee(FOMC) of the Federal Reserve of the United States, which is mandated to decide on the federal funds rate, met on March 17-18, 2015.
The federal funds rate is the interest rate at which one bank lends funds maintained at the Federal Reserve to another bank on an overnight basis. It acts as a sort of a benchmark for the interest rates that banks charge on their short and medium term loans.
In the meeting the FOMC decided to keep the federal funds rate in the range of 0-0.25%, as has been in the case in the aftermath of the financial crisis which broke out in September 2008. Janet Yellen, the chairperson of the Federal Reserve also clarified that “an increase in the target range for the federal funds rate remains unlikely at our next meeting in April.” The next meeting of the FOMC is scheduled on April 27-28, 2015.
The question is when will the Federal Reserve start raising the federal funds rate? As the FOMC statement released on March 18 points out: “In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 % inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”
Other than a clear inflation target of 2%, this is as vague as it can get. The inflation number in January 2015 came in at 1.3%, well below the Fed’s 2% target. The Fed’s forecast for inflation for 2015 is between 0.6% to 0.8%. At such low inflation levels, the interest rates cannot be raised.
But the Federal Reserve wasn’t as vague in the past as it is now. In December 2012, the Federal Reserve decided to follow the Evans rule (named after Charles Evans, who is the President of the Federal Reserve Bank of Chicago and also a part of the FOMC). As per the Evans rule, the Federal Reserve would keep interest rates low till the rate of unemployment fell below 6.5 % or the rate of inflation went above 2.5 %.
As the FOMC statement released on December 12, 2012 said: “ the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 % and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2% longer-run goal, and longer-term inflation expectations continue to be well anchored.”
This is how things continued until March 2014, when the Federal Reserve dropped the Evans rule. In a statement released on March 19, 2014, one year back, the FOMC said: “In determining how long to maintain the current 0 to 1/4 % target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 % inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.” In fact, this is exactly the wording the FOMC has used in the statement released on March 18, 2015.
What the FOMC meant in the March 2014 statement was that instead of just looking at the rate of unemployment and the rate of inflation, the Federal Reserve would also take into account other factors before deciding to raise the federal funds rate. So what made the Federal Reserve junk the Evans rule?
In February 2014, the rate of unemployment was at 6.7% and was closing in on the Evans rule target of 6.5%. In April 2014, the rate of unemployment had fallen to 6.2%.
If the Fed would have still been following the Evans rule, it would have to start raising the Federal Funds rate. This would have meant jeopardising the stock market rally which has been on in the United States. In the aftermath of the financial crisis, the Federal Reserve had cut the federal funds rate to 0-0.25%, in the hope of encouraging people to borrow and spend more, to get their moribund economies going again.
While people did borrow and spend to some extent, a lot of money was borrowed at low interest rates in the United States and other developed countries where central banks had cut rates, and it found its way into stock markets and other financial markets all over the world. This led to a massive rallies in prices of financial assets. In an era of close to zero interest rates the stock market in the United States has seen the longest bull market after the Second World War.
Any increase in the federal funds rate would jeopardise the stock market rally. And that is something that the American economy can ill-afford to. So, it is in the interest of the Federal Reserve to just let the stock market rally on.
Interestingly, the Federal Reserve has been changing the so-called “forward guidance” on raising the federal funds rate for a while now. In March 2009, it had said that short-term interest rates will stay low for an “extended period.” In August 2011, it said that short-term interest rates would stay low till “mid-2013.” In January 2012, the Fed said that short-term interest rates would remain low till “late 2014.” And by September 2012, this had gone up to “mid-2015.”
In March 2014, it junked the Evans rule. So, what this means is that the Federal Reserve will ensure that interest rates in the United States continue to stay low. Peter Schiff, the Chief Executive of Euro Pacific Capital, summarized the situation best when he said that the Federal Reserve would “keep manufacturing excuses as to why rates cannot be raised” and this was simply because it had “built an economy completely dependent on zero % interest rates.”
Given this, be prepared for Janet Yellen offering more excuses for not raising the federal funds rate in the days to come.

The column originally appeared on The Daily Reckoning on Mar 20, 2015

Janet Yellen is not going to takeaway the punchbowl any time soon

yellen_janet_040512_8x10
Central banks are primarily in the business of sending out messages to the financial markets. In a statement released on January 28, 2015, the Federal Reserve of the United States had said: “Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.”
In simple English what this means is that the Fed would be patient when it comes to increasing the federal funds rate, which in the aftermath of the financial crisis which started in September 2008, has been in the range of 0-0.25%. The federal funds rate is the interest rate at which one bank lends funds maintained at the Federal Reserve to another bank on an overnight basis. It acts as a sort of a benchmark for the interest rates that banks charge on their short and medium term loans. This is the longest period for which the rate has remained at such low levels, in over fifty years.
In the aftermath of the financial crisis, the Federal Reserve and other central banks around the world had cut interest rates to very low levels in the hope of encouraging people to borrow and spend more, to get their moribund economies going again.
While people did borrow and spend to some extent, a lot of money was borrowed at low interest rates in the United States and other developed countries where central banks had cut rates, and it found its way into stock markets and other financial markets all over the world. This led to a massive rallies in prices of financial assets. In an era of close to zero interest rates the stock market in the United States has seen the longest bull market after the Second World War.
Given this, the stock markets in the United States and in other parts of the world have been doing well primarily because of this low interest rate scenario that prevails. With the return available from fixed income investments(like bonds and bank deposits) down to very low levels, money has found its way into the stock market.
The January 28 statement was released after a meeting of the Federal Open Market Committee(FOMC) which is mandated to decide on the federal funds rate. These meetings of the FOMC are followed very closely all over the world simply because if the Federal Reserve does decide to start raising the federal funds rate or even give a hint of it, stock markets all over the world will fall.
After the January meeting, the FOMC met again on March 17-18, 2015. In a statement that the Federal Reserve released yesterday (i.e. March 18) after the FOMC meeting, it had dropped the word “patient”. So does this mean that the Federal Reserve will start to be “impatient” when it comes to the federal funds rate?
The Federal Reserve chairperson Janet Yellen held a press conference yesterday after the two day meeting of the FOMC, in which she clarified that: “Modification of our guidance should not be interpreted to mean that we have decided on the timing of that increase. In other words, just because we removed the word “patient” from the statement doesn’t mean we are going to be impatient.”
So what Yellen was essentially saying is that even though the Fed had removed the word “patient” from its statement released yesterday, it was not going to be “impatient,” when it comes to increasing the federal funds rate in particular and interest rates in general. Welcome to the world of central bank speak.
In fact, Yellen also clarified that the FOMC won’t increase the federal funds rate when it meets next towards the end of April, next month. At the same time she said there was a chance that the FOMC might raise the federal funds rate in the meetings after April.
This statement of Yellen has led to the conclusion in certain sections of the media that the Federal Reserve will start raising interest rates June onwards, when it meets next after the April meeting. Only if things were as simple as that. Chances of the FOMC raising interest rates this year are remote. There are multiple reasons for the same.
First and foremost is the fact that inflation in the United States is well below the Federal Reserve’s preferred target of 2%. In fact, for the month of January 2015, this number was at 1.3% much below the Fed’s target of 2%. The Fed’s forecast for inflation for 2015 is between 0.6% to 0.8%. At such low inflation levels, the interest rates cannot be raised.
Inflation is down primarily because of low oil prices as well as the fact that the dollar has rallied (i.e. appreciated) against other major currencies of the world, in the process making imports cheaper for the people of United States. Lower import prices have a significant impact on inflation. The dollar has gone up in value against the yen and the euro primarily because of the money being printed by the Bank of Japan and the European Central bank. This money printing is not going to stop any time soon. As more money is printed and pumped into the financial system, interest rates are likely to remain low. At low interest rates the hope is that people will borrow and spend more and this will benefit businesses and the overall economy.
Getting back to the dollar, an appreciating currency has the same impact on the economy as higher interest rates. Higher interest rates are supposed to slowdown demand and in the process economic growth. Along similar lines when a currency appreciates, the exports of the country become expensive and this leads to a fall in exports. This slows down economic growth. Hence, in a way an appreciating dollar has already done a part of what the Fed would have done by raising interest rates.
With a lot of money printing happening in other parts of the world, chances are the dollar will continue to appreciate. Also, oil prices are likely to remain low during the course of this year, meaning low inflation in the US.
Further in December 2014, the Fed had forecast that economic growth in the US in 2015 will range between 2.6% to 3%. This has been slashed to 2.3% to 2.7%. In this scenario , it doesn’t seem likely that the Federal Reserve will raise the federal funds rate any time soon (may be not during the course of 2015).
William McChesney Martin, the longest serving Federal Reserve Chairman, once said that the job of the Fed is “to take away the punch bowl just as the party gets going.” Yellen as of now doesn’t want to spoil the party. What this means is that the stock market rallies in large parts of the world are likely to continue in the days to come.
The only thing one can say at this point of time is—Stay tuned!

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The article originally appeared on www.firstpost.com on Mar 19,2015