MOHAMED EL-ERIAN: One Fed rate rise in 2016 is 'almost a done deal' and don't rule out the chance of another

Picture: Reuters

Mohamed A. El-Erian, chair of US President Barack Obama’s global development council and Allianz’s chief economic adviser, knows a thing or two about reading central bank tea leaves.

With a storied career which included stints at the IMF and fixed income manager PIMCO, where he was chief executive officer and co-chief investment officer, El-Erian has immersed himself in the nuances of the global economy and central banking.

So it’s interesting that in his post-Fed minutes wrap for Bloomberg this morning, his analysis leaves him with a clear sense that the Fed will raise rates almost certainly at least once and perhaps twice this year.

El-Erian wrote:

“After a period of persistent dovishness and prolonged reliance on unconventional monetary policies, the Fed should now be characterized as a central bank that is inclined to gradually normalize policy absent a major domestic and international economic calamity. The likelihood of at least one rate increase in 2016 is almost a done deal, most probably this summer. The probability of this being followed a second hike, while less certain, should not be dismissed too readily.”

That’s a conclusion forex traders appear to have come to as well. Just a short time after the release of the FOMC minutes, the US dollar strengthened such that the Australian dollar collapsed 1% to 0.7222, the euro lost 0.61% to 1.1219, and the yen the same amount to 110.24.

Likewise, traders in other markets took notice.

The S&P 500 fell 1.3% from peak to trough in the 40 minutes after the release of the minutes before closing largely unchanged on the day. Over in interest rate markets, Fed fund futures double the chances of a June and July hike from the previous day’s close while the yield on US 2-year notes climbed from 0.83% to 0.90%. The brings the rise in that rate to 21 basis points, 30%, since the lows earlier this month.

That’s important, El-Erian says, because “market action before and after the release of the minutes confirmed once again the extent to which financial asset prices remain sensitive to perceptions of the Fed’s policy stance”.

Which means that traders will be on heightened data and Fed speaker watch in the lead up to the FOMC’s next policy meeting on June 14 and 15.

You can read the original story at Bloomberg here.

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