The Markets
It’s not like it’s a surprise!
Last week, investors didn’t appear to be thrilled
with the possibility the Federal Reserve might raise rates this week. They also
weren’t too impressed by another drop in oil prices. There was red ink
everywhere as markets from Australia to Hong Kong, across the Eurozone, and
throughout the Americas moved lower last week.
Bloomberg reported there was a 74 percent probability
of a Fed rate hike at the December Federal Open Market Committee meeting. The Wall Street Journal’s survey of
business and academic economists put the chance at 97 percent. More than 80
percent of those surveyed said the Fed would lose credibility if it doesn’t act
in December.
It’s important to remember the Fed doesn’t
actually set interest rates. It takes actions designed to influence financial
behaviors. Even if the Fed does push to increase interest rates, it remains to
be seen whether its efforts will bear fruit. The Financial Times wrote:
“…As “lift-off” has drawn closer some
analysts have begun to highlight just how experimental this interest rate rise
will be. The Fed’s bloated balance sheet – swelled by its quantitative easing
program – prevents it from using its traditional interest rate tools, so it has
unveiled and has been testing new ones. The main new levers are known as the
“interest on overnight reserves” and the “overnight reverse repo program,” and
central bank officials are confident that they will be able to lift the Fed
funds rate, which is the main target. But some analysts caution that it could
be a choppy take-off.”
If the Fed acts and interest rates don’t
respond, there may be further volatility. The Financial Times reported markets almost certainly have priced in a
rate hike at this point. We’ll find out next week.
next year, China’s renminbi (A.K.A. yuan) will join
the U.S. dollar, euro, yen,
and pound, when it is added to the
International Monetary Fund (IMF)’s Special Drawing Rights (SDR) basket – a supplementary foreign exchange reserve asset
that is defined and maintained by the IMF. It will become the third weightiest
currency in the basket. After the renminbi is added, the U.S. dollar will
comprise 42 percent of the basket (unchanged from 2010). The euro will be 31
percent (down from 37 percent in 2010). The renminbi will be 11 percent. The
Japanese yen will be 8 percent (down from 9 percent in 2010). The British pound
will be 8 percent (down from 11 percent).
Managing
Director of the IMF Christine Lagarde said:
“The Executive Board's decision to include the RMB in the SDR
basket is an important milestone in the integration of the Chinese economy
into the global financial system. It is also a recognition of the progress that
the Chinese authorities have made in the past years in reforming China’s
monetary and financial systems. The continuation and deepening of these efforts
will bring about a more robust international monetary and financial
system, which in turn will support the growth and stability of China and the
global economy.”
So, is the
renminbi likely to give the U.S. dollar a run for its money? Not any time soon,
according to economists surveyed by The
Wall Street Journal. Over the next 50 years, they gave China about a 34
percent chance of challenging the dollar. One said, “To match the dollar’s
appeal, China will need markets as deep as those in the U.S. and to produce
economic indicators that are trustworthy.”
Weekly
Focus – Think About It
“Power is of two kinds. One is obtained by
the fear of punishment and the other by acts of love. Power based on love is a
thousand times more effective and permanent then the one derived from fear of
punishment.”
--Mahatma Gandhi, Former
leader of the Indian independence movement
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