26 August, AtoZForex.com, Lagos – For the first time in a week, there was a rise in the overnight indexed swap rates which gauges traders’ expectations on interbank borrowing costs. This points to the possibility that traders added bets the Federal Reserve would commence interest rate hikes by year-end. This followed the move by the People’s bank of China to again lower borrowing costs and required bank reserves to a view to stabilize its economy.
Even though a large number of traders still believe in a September timing for the commencement of rate hikes, many more believe December is a more ideal time. According to data, traders now see a 26 percent chance that the Fed would increase rates in September, up from 22 percent on Monday. It also showed that traders priced in a 58 percent likelihood of a rate increase in December, up from 50 percent on Monday.
But as traders remain desperate for the impending September rate hikes, the current situation is akin to a scenario where the Fed dropped rates lower instead. Looking at it from a perspective that the Fed has stopped quantitative easing, while also halting rate cuts. This, put together with a stronger U.S. dollar, means despite rates still being near zero, the Fed has effectively been tightening monetary policy. And still, longer-term interest rates are falling. At the start of this month, the yield on the 10-year U.S. Treasury note was nearly 2.3 percent, but has just fallen back below 2 percent amid the global stock-market rout.
Former treasury secretary Lawrence Summers, has opined that if the Fed raises rates at its next meeting, in September, it will be making a “historic mistake. He said: “More than half the components of the consumer price index have declined in the past six months,”
The plunge in oil prices, with WTI currently trading below $40 per barrel, as well as other commodity prices has added renewed downward momentum to the global inflation cycle. Also, concerns over China, the biggest driver of global growth the past decade, is notably slowing and already experiencing deflation on the wholesale-price level. Also, a slowdown in other markets across the Middle East, Asia, and Latin America, is occurring as the global economy seems to be turning bearish again.