How will the Fed cope with rising borrowing costs in the United States?

How will the Fed cope with rising borrowing costs in the United States?

The minutes of the Federal Reserve’s latest monetary policy meeting will be released on Wednesday, giving investors an overview of ongoing central bank discussions on the path of the economic recovery and the recent rise in borrowing costs for governments. -United.

The March meeting took place against the backdrop of a significantly improved economic outlook. The $ 1.9 billion stimulus package adopted by the Biden administration has prompted a rethinking of the pace of the recovery, with economists dramatically increasing their forecasts for growth and inflation.

These revisions dampened investor appetite for US government bonds, leading to lower prices. Yields, which rise as prices fall, have soared, with the benchmark 10-year note now trading around 0.1 percentage point below its 14-month high of 1.78%.

In addition to potentially providing more detail on the Fed’s sensitivity to rising borrowing costs, the report could reveal a glimpse of plans to raise rates to their historically low levels.

The central bank released its dot plot of interest rate projections last month, and although it signaled it would not hike rates until at least 2024, more officials have looked at interest rate hikes earlier than at the December meeting.

The timing will mainly depend on the way forward for growth and inflation, especially given the Fed’s new commitment to let inflation exceed its long-standing 2% target.

“The scale of the fiscal stimulus absolutely increases the risk of inflation breaking out. . . but we also went through an extremely long period where it was very difficult for the Fed to even meet its inflation target, ”said Greg Wilensky, head of US fixed income at Janus Henderson.
Colby Smith

How well will the UK economy rebound?

The UK services sector, hampered by coronavirus-induced lockdowns for most of the past year, is expected to post a sharp rise in activity for March, building on earlier estimates and prompting the hope for an even brighter April.

The final IHS Markit Service Purchasing Managers Index figures for March, released on Wednesday, arrive days before the April 12 reopening of non-essential stores, personal care services, indoor sports centers and outdoor spaces of hospitality venues such as bars, pubs and restaurants across England. Services represent around 80 percent of the UK economy.

The latest figures – supposed to reflect upward trends in non-standard economic measures – follow a sharp drop in January and a recovery in February during England’s third lockdown.

In March, visits to retail and entertainment venues were up by half of the February 2020 average, dropping 63% below average in January, according to data from Google Mobility. This corresponds to the increase in credit and debit card spending published by the Office for National Statistics during the same period.

The consumer-led economic recovery expected in the spring is supported by an unprecedented amount of household savings accumulated during the pandemic, said Howard Archer, chief economic adviser at UK economic forecasting group EY Item Club.

He also underlined a renewed optimism of consumers following the rapid deployment of the Covid-19 vaccine and the announcement by the government at the end of February of the roadmap for the reopening.

“On top of that, the job market is proving to be more resilient than it looked likely at the start of the year,” said Archer. “We are ready to significantly increase our current projection of 5% GDP growth for this year.”
Valentina romei

Can the price of gold recover?

Gold had its worst quarter since the last three months of 2016, falling 10% after investors lost their enthusiasm for the precious metal.

This year’s decline came as rising bond yields and expectations of a pickup in US economic growth thanks to the $ 1.9 billion stimulus package made other assets more attractive.

Higher bond yields dampen the appeal of gold because the metal provides no interest payments. Treasury yields have skyrocketed this year.

At the same time, vaccinations against Covid-19 are fueling hopes for a global economic recovery, which has boosted stock markets. This eroded the attractiveness of gold as a safe haven asset.

“We expect demand for safe-haven securities to decline further this year, which should weigh on [gold] price, ”said Carsten Menke, research manager at Julius Baer.

Gold hit $ 1,678 an ounce last week, just above its year-round low of $ 1,677 an ounce on March 8. It ended last week around $ 1,730.

Adrian Ash, head of research at online precious metals retailer BullionVault, warned that it was natural for gold to forgo some of its gains after a very strong year in 2020. Gold hit a higher record. at $ 2,000 an ounce in August due to a surge in purchases. gold-backed exchange-traded funds.

Investors could also be overly optimistic about the end of the pandemic, Ash added, which means gold could still play a role as a form of protection for investors.

“The markets are rushing to say it’s over – frankly it’s not,” he said.
Henry sanderson