According to the Fed meeting minutes released yesterday, interest rates will be raised in the “near term”. Markets’ expectations regarding a rate hike have not changed much and are still standing above 90%. The fed was clearly not in a hurry to send a very hawkish signal.
The inflation remains one very important topic and in particular the path consumer prices will take. Minutes show that the debate is still open amongst policymakers regarding inflationary pressures. In our view and as we mentioned yesterday we rather believe that there are strong inflationary pressures but the predictable inability to raise rate above a certain level – Risk of bursting the bond bubble would be very high - obliges the Fed to send mixed signals on inflation. Yellen’s comment stating “We are monitoring inflation very closely” seems contradictory with the reality of the monetary policy.
It is going to be very tough to switch a very loose monetary policy from a tighter one. Inflation is now there and will help to kill the massive debt accumulated. Right now, the dollar continues to weaken against the single currency.
By Yann Quelenn