Fed Vice Chair Fischer states that the Fed is close to meeting targets – MUFG

Lee Hardman, Currency Analyst at MUFG, suggests that the US dollar is deriving support from the gradual drift higher in US yields particularly at the short end of the curve.

Key Quotes

“The yield on the two-year US Treasury bond has reached its highest level since the UK referendum on the 23rd June. The initial negative shock from the Brexit vote has been limited and should not have a material impact on the outlook for the US economy and Fed policy. Logically it makes sense that the initial Brexit driven adjustment lower in US yields is reversing. It leaves the Fed still on course to resume rate hikes this year although the exact timing of the next rate hike is not yet clear.

We agree with the comments from Fed Vice Chair Dudley last week that investors had become too complacent over the likelihood of further Fed tightening. The US dollar would derive more support if the market adjusted to discount more than just one hike by the end of next year.

Comments from Fed Vice Chair Fischer have contributed to the US dollar’s upward momentum at the start of this week. He stated that the Fed is “close to meeting its targets” of full employment and price stability which is within “hailing distance”. The labour market was described as remarkably resilient in the face of the surprisingly weak patch for investment growth. He expects economic growth to pick up in the second half of this year.

As a result, a rate hike is still under consideration this year although he gave clear guidance over when it is likely to be delivered. He also discussed weaker productivity growth which has averaged 1.25% per year from 2006 to 2015 compared to 2.5% from 1949 to 2005. If the slower rate of productivity growth persists, he expects it to have wide-reaching consequences for employment, wage growth, and economic policy. It has already contributed to the Fed signalling that they will raise rates more gradually and to a much lower terminal rate than in previous tightening cycles.”