Global monetary taps still open wide, Fed minutes in focus

Fri Aug 12, 2016 10:25am EDT
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By Ross Finley

LONDON (Reuters) - The glue binding a still-aggressive global monetary policy response to a struggling world economy and almost daily record highs for world stock markets along with record low bond yields is set to remain intact in the coming week.

The one thing that could unstick it, apart from divine intervention, would be a change in tune from the U.S. Federal Reserve, which is still toying with when to deliver a follow-up interest rate hike to last December's baby step-up from zero.

Minutes to the Fed's July policy meeting due on Wednesday may come under more scrutiny than normal given the central bank really only has one opportunity left, at its meeting next month, to raise rates before the November presidential election.

Fed officials have given differing and often conflicting signals throughout much of this year on when the next move will come, leaving few with any clear sense of how much of a risk there is of a September rate rise.

Interest rate futures contracts in financial markets, as well as the median probability given by economists in a recent Reuters poll, suggest the chances are low and that if they go this year at all, December is more likely. [ECILT/US]

"Our guess is that the market-implied odds of a 2016 rate hike will trend up over the remainder of the month, with both the FOMC minutes on August 17 and Chair (Janet) Yellen's Jackson Hole speech on August 26 likely to suggest that September is very much a live meeting," wrote Lou Crandall, Fed watcher at Wrightson ICAP, in a recent client note.

In the meantime, Fed officials have been dropping hints. San Francisco Fed President John Williams said in a newspaper interview that the Fed's planned gradual pace of interest rate hikes means, in his view at least, a hike will come this year.

But given the waves of central bank cash flowing from the European Central Bank, Bank of Japan - and now again the Bank of England's purchases of tens of billions of dollars worth of securities a month - the Fed appears to be leaning into the prevailing global winds.   Continued...

A man walks past the Federal Reserve Bank in Washington, D.C., U.S. December 16, 2015.  REUTERS/Kevin Lamarque/File Photo