World markets bet Fed rates back on the rise
By Mike Dolan
LONDON, March 2 (Reuters) - Global markets are betting the U.S. Federal Reserve's
interest rate holiday is over.
Just over three months after the Fed completed a 0.75 percentage point cut in key interest
rates -- ostensibly to soften the blow from last year's deep financial turmoil in developing economies -- markets are now
betting it may reverse at least some of that easing soon.
Both futures markets in three-month Eurodollar deposits and the key Federal Funds target rate are already pricing in a quarter
point rise in short-term rates by mid-year and a half point rise by September.
Contrary to the Fed's original fears, crises in emerging markets from Asia to Russia to Latin America have had little or no
perceptible effect on the real U.S. economy, analysts argue.
Data moving into 1999 has been unexpectedly robust and the relentless strength in U.S. equities is gnawing at policymakers
concerned about the development of an asset price bubble.
''The last rate cut from the Fed was probably too much and you could now even make a case for the Fed reversing all of the
insurance it took out last year,'' said Paul Meggyesi, senior currrency economist at Deutsche Morgan Grenfell.
''It took out that insurance to prevent a paralysis in global financial markets. Now, not only has that paralysis failed to
materialise, it's not had any effect on the domestic economy.''
Last week's upward revision to fourth-quarter gross domestic product growth to a rapid 6.1 percent was a shock to even the
most ardent growth bull.
On Monday, February's National Association of Purchasing Management index indicated an expansion in the U.S. factory
sector for the first time in eight months and a rise in exports for the first time since 1997.
Meantime, Fed policymakers, meeting on March 30, have been keen to prepare the market for a reassessment of its stance.
Chairman Alan Greenspan flagged the change in mood at his congressional testimony last week.
''The Federal Reserve must continue to evaluate...whether the full extent of the policy easings undertaken last fall to address
the seizing up of financial markets remains appropriate as those disturbances abate.''
New York Fed Governor William McDonough reinforced the point on Monday.
''The purely domestic economy is so very robust that we could have some strains on resources,'' he said. ''As we get into the
FOMC (Federal Reserve Open Market Committee) meeting at the end of March, we will need to decide where the balance
of risks is.''
Markets have taken the hints and the data on board.
As well as the move in the futures market, benchmark 30-year bond yields have surged in recent weeks, touching 5.68 percent
on Tuesday for the first time since August 6.
''In early December another easing was priced into the market (but) in the short end there has been a swing of around 75
basis points,'' said Hans Redeker, international economist at Chase investment bank. ''The strength of the U.S. economy is
surprising even those who were constructive on it.''
Buoyed by higher interest rate returns on dollar assets, the dollar itself has been boosted on the foreign exchanges by almost
nine percent against the euro and almost six percent against the yen since the start of the year.
The impact of the shift in U.S. policy expectations has been noticeable on other world markets too as the concerns about a
drainage of investment funds from around the globe acts as a drag on bonds well beyond the United States.
Ten-year euro-denominated benchmark yields have risen more than a quarter point despite continually weak economic data
from the euro zone of countries.
In emerging markets, which benefitted most from last year's Fed easing, yield spreads on sovereign bonds have been rising
again in recent weeks. But analysts now reckon the effect of the implosion of many developing economies on U.S. policy has
been far less than initially estimated. |
