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Bonds & Interest Rates

Gold, Second Fed Hike and Interest Rates

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Posted by Arkadiusz Sieron

on Friday, 24 February 2017 07:30

The narration of reflation and ‘Great Fiscal Rotation’ imply that the Fed will hike interest rates in a more aggressive way in a response to accelerated growth and higher inflation. We have already covered the Fed’s likely policy in 2017 in the previous edition of the Market Overview, but let’s discuss the impact of higher interest rates for the U.S. dollar and gold once again. It is widely believed that higher interest rates are bullish for greenback and bearish for the yellow metal. Is that really so? Some analysts do not agree with that opinion, pointing out that the U.S. dollar did not rally during Fed tightening cycles. Therefore, the hawkish Fed may be actually good for gold, they argue.

They are right, in some senses. Just look at the chart below: the tightening cycle which took place in 2004-2006 was actually bearish for the greenback and bullish for gold, while the U.S. dollar was essentially traded sideways during ZIRP.

Chart 1: The broad trade weighted U.S. dollar index (green line, right axis) and the effective federal funds rate (red line, left axis, in %) from 1973 to 2016.

1-us-dollar-and-effective-federal-funds-rate

However, the three previous tightening cycles corresponded with the bullish dollar. Actually, the federal funds rate does not matter. As we have emphasized many times, what really counts for gold prices are the real interest rates, not the federal funds rate. The chart below illustrates that truth (we use the 1-year treasury yield adjusted for the CPI, since the yields at 10-year inflation-protected treasuries are available only since 2003).

Chart 2: The price of gold (right axis, yellow line, London P.M. Fix), the federal funds rate (red line, left axis, in %) and the real interest rates (green line, left axis, as 1-year treasury yield less CPI year-over-year, in %) from 1953 to 2016.



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Bonds & Interest Rates

FOMC Minute Hint At Hike "Fairly Soon", But Warn Trump Policies May "Not Materialize", VIX Too Low

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Posted by ZeroHedge

on Thursday, 23 February 2017 09:14

20170222 fomc2 0

March rate hike odds are unchanged (below 40%) and the yield curve has flattened since The Fed's February statement (despite heavy jawboning and higher inflation data) and so the Minutes were expected to help ease the markets to not be surprised. And they were...MANY FED OFFICIALS SAW HIKE `FAIRLY SOON' IF ECONOMY ON TRACK. However, the Minutes also showed 'balance' by not proclaiming concern over inflation - *MANY FED VOTERS SAW ONLY MODEST RISK OF SIGNIFICANT INFLATION and FED OFFICIALS SAW DOWNSIDE RISKS FROM FURTHER DOLLAR STRENGTH.

Here is the key excerpt in which the Fed says a rate hike may be needed "fairly soon" if all goes according to plan..

....read the excerpt and more analysis HERE



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Bonds & Interest Rates

A Game Of Chess And The Source Of The Federal Reserve’s Power

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Posted by Kelsey Williams - The Market Oracle

on Wednesday, 22 February 2017 06:04

imagesWe have become pawns in the game of Chess being played by the Federal Reserve Bank.  Who is their opponent?  Anybody else who makes a move.

Week in, week out, everyone’s eyes and ears seem fixed on what the Federal Reserve Board will say or do.  Mostly, it is about what they say. That’s because they can’t really do much of anything.

Except inflate the supply of money and credit.  Which they have been doing for over one hundred years.  And they are good at it, too.  The historic erosion in value of the US dollar should merit more acclaim – or outrage.  Unfortunately, the Fed is good at shifting the focus of concern to their opponent(s).

In their various statements, members of the Federal Reserve Bank often refer to their policies, decisions, and efforts in ways that make them sound sincere about their attempt to “manage the economy”.  And, admittedly, they are sincere in that attempt.  The trouble is, it is an impossible task.

The US Federal Reserve has led us down a primrose path by virtue of their self-proclaimed intention to manage and modify the stages of the economic cycle (prosperity, inflation, recession, depression).

...continue reading HERE

 

....related by Larry Edelson: Why you shouldn’t fear rising interest rates …



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Bonds & Interest Rates

Jim Bianco: Extreme Readings in the Bond Market

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Posted by Jim Bianco via Financial Sense Insider

on Thursday, 09 February 2017 07:28

Youre-FiredYellen's Last Hike and the Next Fed Chair

Janet Yellen, you're fired!

For the past 20-30 years, the Federal Reserve has been dominated by academics largely out of MIT. Jim Bianco at Bianco Research says that's all going to change under Trump, starting with Fed chair Janet Yellen.

Here's what he recently told FS Insider:

Yellen's Last Hike

"I've jokingly said that when it comes to the story with the Fed this year, it's that the Fed will raise rates in June and then Janet Yellen will be fired by Trump right after that. Her term is up in January 2018. What we've learned about Trump is what he says he means and what he means he says, and he has said repeatedly during the campaign that he doesn't like Janet Yellen, doesn't think she's done a good job. She's done, she's out. And she's got another year to go...so that's what I mean when I say the Fed will raise rates the middle of the year and then Trump will fire Yellen."

....continue reading more of what Bianco has to say HERE

 

...related:

Wolf Richter: Central Banks Quietly Backing Out of Negative Interest Rate Policies (NIRP)

 



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Bonds & Interest Rates

Why you shouldn’t fear rising interest rates …

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Posted by Larry Edelson - Money & Markets

on Wednesday, 08 February 2017 06:40

I’ve got to hand it to the majority of pundits out there. They just never learn to think for themselves. They keep dishing out the same nonsense, over and over again.

For instance, the notions that rising interest rates will kill off equity market gains, particularly in the U.S. … or choke off a real estate recovery … or kill the gold market for good — are myths. Period.

It might be true if interest rates were at record highs and well above the rate of inflation. But they are not. Interest rates are coming off of historic record lows in many parts of the world — even below zero in some countries — and they are far below the rate of inflation.

That’s important to understand. As rates rise from essentially 5,000-year-low levels — no matter what any central bank does — many investors will run for cover. But the only market that rising interest rates will truly hurt is the value of sovereign bonds. In other words, it will demolish governments’ ability to ever borrow again (a good thing).

Screen Shot 2017-02-08 at 6.22.25 AMConsider what’s happening right now with real estate. Why would rising mortgage rates — at this point in the economic cycle and recovery — be bad for property prices?

They won’t be bad. For the simple reason that as mortgage rates start to rise, all the pent-up demand for property will come out of the woodwork and start buying — in anticipation of further increases in the cost of borrowed funds.

That’s precisely what is happening in the U.S., in particular, where a housing recovery is well underway.

Consider the latest data from brokerage Douglas Elliman Real Estate, where January 2017 was an excellent month for high-end sales in Connecticut and where sales from $1 million all the way up to $5 million increased significantly compared to January 2016.

Overall, total inventory is down to 447 houses which is 13 lower than last year at this time, while total sales are up 16.



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