<figure class="wp-block-image size-large"><img decoding="async" loading="lazy" width="820" height="547" src="https://cms.cnbcafrica.com/wp-content/uploads/2022/03/FederalReserve-820x547.jpg" alt="" class="wp-image-416006" srcset="https://cms.cnbcafrica.com/wp-content/uploads/2022/03/FederalReserve-820x547.jpg 820w, https://cms.cnbcafrica.com/wp-content/uploads/2022/03/FederalReserve-300x200.jpg 300w, https://cms.cnbcafrica.com/wp-content/uploads/2022/03/FederalReserve-135x90.jpg 135w, https://cms.cnbcafrica.com/wp-content/uploads/2022/03/FederalReserve-768x512.jpg 768w, https://cms.cnbcafrica.com/wp-content/uploads/2022/03/FederalReserve-1536x1024.jpg 1536w, https://cms.cnbcafrica.com/wp-content/uploads/2022/03/FederalReserve-scaled.jpg 2048w" sizes="(max-width: 820px) 100vw, 820px" /><figcaption class="wp-element-caption">A security guard walks in front of an image of the Federal Reserve following the two-day Federal Open Market Committee (FOMC) policy meeting in Washington, March 16, 2016. REUTERS/Kevin Lamarque</figcaption></figure>



Despite a year’s worth of interest rate increases, inflation rose again in March, according to economic data released Friday that the Federal Reserve watches closely.



The personal consumption expenditures price index excluding food and energy increased 0.3% for the month, in line with the Dow Jones estimate. On an annual basis, so-called core PCE increased 4.6%, slightly higher than the expectation for 4.5% and down 0.1 percentage point from February.



Including the volatile food and energy components, headline PCE also rose just 0.1% for the month, equating to a 4.2% annual increase, down sharply from 5.1% in February. That measure peaked out around 7% in June 2022, the highest level since December 1981.



The headline number was softer as energy prices slid 3.7% for the month while food costs declined 0.2%. Goods prices fell 0.2% while services increased 0.2%.



In another key inflation measure for the Fed, the employment cost index increased 1.2% for the first quarter, higher than the 1% estimate.



The inflationary pressures were reflected in the willingness of consumers to keep spending. Personal income rose 0.3% for the month but consumer spending was flat, as expected.



While the annual rates are below the peaks hit in 2022, they are still well above the central bank’s 2% target and further evidence that price increases are proving stickier than policymakers had anticipated.



Since March 2022, the Fed has raised its benchmark interest rate nine times for a total of 4.75 percentage points. Markets widely expect the rate-setting Federal Open Market Committee to approve another quarter percentage point increase at next week’s meeting, before it pivots to see the impact the policy tightening is having on the $26.5 trillion U.S. economy.

FederalReserve

Key inflation gauge for the Fed rose 0.3% in March as expected

KEY POINTS



<ul><li>Fed Chair Jerome Powell said he will back interest rate increases until prices start falling back toward a healthy level.</li><li>“If that involves moving past broadly understood levels of neutral we won’t hesitate to do that,” the central bank leader told the Wall Street Journal</li></ul>



Federal Reserve Chair&nbsp;<a href="https://www.cnbc.com/jay-powell/">Jerome Powell</a>&nbsp;emphasized his resolve to get inflation down, saying Tuesday he will back interest rate increases until prices start falling back toward a healthy level.



“If that involves moving past broadly understood levels of neutral we won’t hesitate to do that,” the central bank leader told The Wall Street Journal&nbsp;<a href="https://www.wsj.com/articles/feds-powell-to-take-wsj-questions-on-inflation-and-economic-outlook-11652779802" target="_blank" rel="noreferrer noopener">in a livestreamed interview</a>. “We will go until we feel we’re at a place where we can say financial conditions are in an appropriate place, we see inflation coming down.



“We’ll go to that point. There won’t be any hesitation about that,” he added.



Earlier this month, <a href="https://www.cnbc.com/2022/05/04/fed-raises-rates-by-half-a-percentage-point-the-biggest-hike-in-two-decades-to-fight-inflation.html">the Fed raised benchmark borrowing rates</a> by half a percentage point, the second increase of 2022 as inflation runs around a 40-year high.



Powell said following that increase that similar 50 basis point moves were likely to come at ensuing meetings so long as&nbsp;<a href="https://www.cnbc.com/2022/05/17/retail-sales-april-2022-up-0point9percent-vs-1point0percent-estimate.html">economic conditions</a>&nbsp;remained similar to where they are now.



On Tuesday, he repeated his commitment to getting inflation closer to the Fed’s 2% target, and cautioned that it might not be easy and could come at the expense of&nbsp;<a href="https://www.cnbc.com/2022/05/06/job-growth-accelerated-by-428000-in-april-more-than-expected-as-jobs-picture-stays-strong.html">a 3.6% unemployment rate</a>&nbsp;that is just above the lowest level since the late 1960s.



“You’d still have a strong labor market if unemployment were to move up a few ticks,” he said. “I would say there are a number of plausible paths to have a soft as I said softish landing. Our job isn’t to handicap the odds, it’s to try to achieve that.”



The U.S. economy saw growth contract at a 1.4% pace in the first quarter of 2022, due largely to ongoing supply side constraints, spread of the omicron Covid variant and the <a href="https://www.cnbc.com/2022/05/17/russia-ukraine-live-updates.html">war in Ukraine</a>.



However, tighter monetary policy has added to concerns about a steeper downturn and has sparked an aggressive sell-off on Wall Street. In addition to the 75 basis points in interest rate hikes, the Fed also has halted its monthly bond-buying program, which is also known as quantitative easing, and will begin shedding some of the $9 trillion in assets it has acquired starting next month.



Powell said he still hopes the Fed can achieve its inflation goals without tanking the economy.



“You’d still have a strong labor market if unemployment were to move up a few ticks. I would say there are a number of plausible paths to have a soft as I said softish landing. Our job isn’t to handicap the odds, it’s to try to achieve that,” he said.



He added that “there could be some pain involved to restoring price stability” but said the labor market should remain strong, with low unemployment and higher wages.

Federal Reserve Chairman Jerome Powell Photo: via Flickr

Powell says the Fed will not hesitate to keep raising rates until inflation comes down

KEY POINTS



<ul><li>The Federal Reserve increased its benchmark interest rate by half a percentage point, in line with market expectations.</li><li>In addition, the central bank outlined a program in which it eventually will reduce its bond holdings by $95 billion a month.</li><li>The rate move is the largest since 2000 and is in response to burgeoning inflation pressures.</li><li>Fed Chairman Jerome Powell underlined the commitment to bringing inflation down but indicated that raising rates by 75 basis points at a time “is not something the committee is actively considering.”</li></ul>



WASHINGTON — The Federal Reserve on Wednesday raised its benchmark interest rate by half a percentage point, the most aggressive step yet in its fight against a 40-year high in inflation.



“Inflation is much too high and we understand the hardship it is causing. We’re moving expeditiously to bring it back down,” Fed Chairman Jerome Powell said during a news conference, which he opened with an unusual direct address to “the American people.” He noted the burden of inflation on lower-income people, saying, “we’re strongly committed to restoring price stability.”



That likely will mean, according to the chairman’s comments, multiple 50-basis point rate hikes ahead, though likely nothing more aggressive than that.



The federal funds rate sets how much banks charge each other for short-term lending, but also is tied to a variety of adjustable-rate consumer debt.



Along with the move higher in rates, the central bank indicated it will begin reducing asset holdings on its&nbsp;<a href="https://www.federalreserve.gov/releases/h41/20220428" target="_blank" rel="noreferrer noopener">$9 trillion balance sheet</a>. The Fed had been buying bonds to keep interest rates low and money flowing through the economy during the pandemic, but the surge in prices has forced a dramatic rethink in monetary policy.



Markets&nbsp;<a href="https://www.cnbc.com/2022/05/02/fears-of-a-fed-mistake-grow-as-this-weeks-anticipated-interest-rate-hike-looms.html">were prepared for both moves</a>&nbsp;but nonetheless have been volatile throughout the year. Investors have relied on the Fed as an active partner in making sure markets function well, but the inflation surge has necessitated tightening.



Wednesday’s rate hike will push the federal funds rate to a range of 0.75%-1%, and current market pricing has the rate rising to 2.75%-3% by year’s end, according to CME Group data.



Stocks leaped higher following the announcement while Treasury yields backed off their earlier highs.



Markets now expect the central bank&nbsp;<a href="https://www.cnbc.com/2022/05/03/the-fed-is-expected-to-raise-rates-by-a-half-point-investors-wonder-if-it-will-get-more-aggressive.html">to continue raising rates aggressively</a>&nbsp;in the coming months. Powell, said only that moves of 50 basis points “should be on the table at the next couple of meetings” but he seemed to discount the likelihood of the Fed getting more hawkish.



“Seventy-five basis points is not something the committee is actively considering,” Powell said, despite market pricing that had leaned heavily towards the Fed hiking by three-quarters of a percentage point in June.



“The American economy is very strong and well-positioned to handle tighter monetary policy,” he said, adding that he foresees a “soft or softish” landing for the economy despite tighter monetary policy.WATCH NOWVIDEO03:04A 75 basis point increase is not something we’re actively considering, says Fed Chair Powell



The plan outlined Wednesday will see the balance sheet reduction happen in phases, with the Fed allowing a capped level of proceeds from maturing bonds to roll off each month while reinvesting the rest. Starting June 1, the plan will see $30 billion of Treasurys and $17.5 billion on mortgage-backed securities roll off. After three months, the cap for Treasurys will increase to $60 billion and $35 billion for mortgages.



Those numbers were mostly in line with discussions at the last Fed meeting, as described in minutes from the session, though there were some expectations that the increase in the caps would be more gradual.



Wednesday’s statement noted that economic activity “edged down in the first quarter” but noted that “household spending and business fixed investment remained strong.” Inflation “remains elevated,” the Fed statement said.



Finally, the statement addressed the Covid outbreak in China and the government’s attempts to address the situation.



“In addition, Covid-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks,” the statement said.



“No surprises on our end,” said Collin Martin, fixed income strategist at Charles Schwab. “We’re a little bit less aggressive on our expectations than the markets are. Do think another 50 basis point increase in June seems likely. … We think inflation is close to peaking. If that shows some signs of peaking and declines later in the year, that gives the Fed a little leeway to slow down on such an aggressive pace.”



Though some Federal Open Market Committee members had pushed for bigger rate increases, Wednesday’s move received unanimous support.



The 50-basis-point increase is the biggest increase the rate-setting FOMC has instituted since May 2000. Back then, the Fed was fighting the excesses of the early dotcom era and the internet bubble. This time around, the circumstances are quite a bit different.



As the pandemic crisis hit in early 2020, the Fed slashed its benchmark funds rate to a range of 0%-0.25% and instituted an aggressive program of bond buying that more than doubled the size of its balance sheet. At the same time, Congress approved a series of bills that injected more than $5 trillion of fiscal spending into the economy.



Those policy moves were followed by clogged supply chains and surging demand as economies reopened. Inflation over a 12-month period&nbsp;<a href="https://www.cnbc.com/2022/04/12/consumer-prices-rose-8point5percent-in-march-slightly-hotter-than-expected.html">rose 8.5% in March</a>, as gauged by the Bureau of Labor Statistics’ consumer price index.



Fed officials for months dismissed the inflation surge as “transitory” then had to rethink that position as the price pressures did not relent.



For the first time in more than three years, the FOMC in March&nbsp;<a href="https://www.cnbc.com/2022/03/16/federal-reserve-meeting.html">approved a 25-basis-point increase</a>, indicating then that the funds rate could rise to just 1.9% this year. Since then, though, multiple statements from central bankers&nbsp;<a href="https://www.cnbc.com/2022/04/05/feds-brainard-sees-balance-sheet-reduction-soon-and-at-a-rapid-pace.html">pointed to a rate well north of that</a>. Wednesday’s move marked the first time the Fed has boosted rates at consecutive meetings since June 2006.



Stocks have tumbled through this year, with the Dow Jones Industrial Average off nearly 9% and bond prices falling sharply as well. The benchmark 10-year Treasury yield, which moves opposite price, was around 3% Wednesday, a level it hasn’t seen since late 2018.



When the Fed was last this aggressive with rate hikes, it took the funds rate to 6.5% in early 2000, but was forced to retreat just seven months later. With the combination of a recession already underway plus the Sept. 11, 2001 terrorist attacks, the Fed rapidly cut, eventually slashing the funds rate all the way down to 1% by mid-2003, shortly after the Iraq invasion.



Some economists worry the Fed could face the same predicament this time — failing to act on inflation when it was surging, then tightening in the face of slowing growth. GDP fell 1.4% in the first quarter, though it was held back by factors such as rising Covid cases and a slowing inventory build that are expected to ease through the year.

106999520-16419153682022-01-11t153007z_1471999278_rc23xr9k3c5b_rtrmadp_0_usa-fed-senate-powell

Fed raises rates by half a percentage point — the biggest hike in two decades — to fight inflation

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The U.S Federal Reserve will hold a two-day meeting this week. Some analysts say while they do not expect major policy changes, they will be paying close attention to comments by U.S Fed Chairman, Jerome Powell especially on tapering bond purchases. Fitch ratings earlier warned that some of the world&#8217;s poorest countries were exposed to the risk of another taper tantrum as higher bond yields in the U.S could lead to a higher cost of Emerging Market borrowing. Dayo Amzat, Managing Director and CEO of Zedcrest Capital joins CNBC Africa for more.

US Fed tapering fears: What it means for emerging markets

(Reuters) &#8211; Fear is ebbing on Wall Street, with stocks on a bull run in the midst of the global coronavirus pandemic.



The Cboe Volatility Index , known as Wall Street’s “fear gauge,” is near its lowest level since late February and options markets are showing diminishing concerns of a near-term drop in equities.



The S&amp;P 500&#8217;s&nbsp;<a href="https://www.reuters.com/finance/markets/index?symbol=.SPX">.SPX</a>&nbsp;run to fresh highs has come as some of Wall Street&#8217;s biggest banks, including Goldman Sachs, UBS Global Wealth Management and Morgan Stanley, turn more bullish on stocks and are urging clients to remain exposed to equities. The index ended at a record high on Tuesday, confirming a bull market, according to one definition.



Investors may well heed their advice: nearly 80% of fund managers surveyed by BofA Global Research, the highest level in more than a decade, expect the global economy to grow over the next year. The survey also showed falling allocations to cash, another sign of increasing bullishness.



The growing optimism is in contrast to the fear and gloom that prevailed on Wall Street only months ago, after the S&amp;P 500 plunged 34% in just 23 trading days and the economy entered a recession that would turn out to be its worst since the Great Depression.



Although financial pain remains acute for many Americans, monetary support from the Federal Reserve and expectations for advances in fighting the coronavirus pandemic have made investors more confident in betting on the future, said Quincy Krosby, chief market strategist at Prudential Financial.



“You have a market that sees that we’re getting closer and closer to a more normal world,” she said.



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Options markets are among the areas reflecting fading investor worries. Demand for protection against drops in U.S. equities of 30% or more has fallen as volatility has eased in recent months, said Paul Sandhu, BNP Paribas Asset Management’s head of multi-assets quant solutions in the Asia-Pacific region.



“The fear has definitely lessened over the (past) couple of months,” he said.



Meanwhile, selling of protective put options in individual stocks is up over the past week, said Christopher Murphy, co-head of derivatives strategy at Susquehanna Financial Group. Put sellers profit if the underlying stock does not drop to a specified level.



The put selling suggests investors are less worried about the downside, Murphy said.



In futures markets, net long equity positioning is now at its highest level since early March, with increases in both large-cap and small-cap stocks, Deutsche Bank data showed.



The increasingly bullish positioning dovetails with the messages coming from big Wall Street banks. Goldman Sachs, for instance, raised its year-end target for the S&amp;P 500 earlier this week to 3,600 from 3,000, citing expectations for outsized growth in U.S. corporate earnings and gross domestic product next year.



Stocks have dipped since Tuesday, but several market strategists said they saw the pullback as routine rather than a sign that equities had been overbought.



Yet there are plenty of reasons for investors to be nervous and some remain skeptical of buying near all-time highs.



One concern is the potential of market volatility stemming from delayed or contested results in November&#8217;s U.S. presidential election. The Dow Jones Industrial Average&nbsp;<a href="https://www.reuters.com/finance/markets/index?symbol=.DJI">.DJI</a>&nbsp;fell 5% in two weeks on the heels of a vote recount in the 2000 presidential election, UBS noted.



Other risks include a resurgence of COVID-19 cases, delays in a vaccine or delays by lawmakers in providing more stimulus to the still-ailing economy.



Some of that uncertainty has been reflected in the price of gold, a popular haven that has climbed to record highs this month. Prices recently got an additional boost after Berkshire Hathaway Inc (<a href="https://www.reuters.com/companies/BRKa.N">BRKa.N</a>) disclosed a stake in Barrick Gold Corp (<a href="https://www.reuters.com/companies/ABX.TO">ABX.TO</a>).



Still, some investors believe the prospect of economic recovery now outweighs those risks. Keith Lerner, chief market strategist at Truist/SunTrust Advisory Services, is maintaining an overweight position in U.S. equities.



“We’re not taking anything off the table,” he said. “We’re staying with the primary trend, which is still higher.”

wall street

Fear fading on Wall Street as investors learn to love the new bull market

By Dr Victor Oladokun, outgoing Director of Communication &amp; External Relations at the African Development Bank Group



Why
Africa Urgently Needs an Ubuntu Plan



Africa urgently needs a globally
coordinated Ubuntu Plan in response to COVID-19, a fiscal stimulus that
recognises our shared and connected humanity, as we find ourselves in the midst
of an unprecedented crisis.



The
world&#8217;s largest cities are eerily silent. One virus has disrupted the whole
world in a manner never seen before in history.



COVID-19,
a term that did not exist in our vocabulary a couple of months ago, has brought
virtually everything to a grinding halt. It&#8217;s a surreal almost cinematic scene.
Except that we are all living through it.&nbsp;




With governments balancing economies and
the welfare of their citizens, entire industries and institutional systems find
themselves fighting for survival in the midst of mandatory lockdowns. Food
supply chains, transportation networks, educational systems, governance and
judicial systems are either strained or barely functioning with medical
services being the worst hit.



Unlike
any other pandemic, COVID-19 will alter the way we live, work, and
socialise.&nbsp; The financial costs and the
economic devastation are already of epic proportions. This is why Africa in
particular urgently needs an Ubuntu Plan. A globally coordinated fiscal
stimulus plan that recognises our shared and connected humanity. 



The
case for an Ubuntu Plan



This
past week, America passed a 2 trillion Dollar stimulus package that will keep
markets operational, support Americans out of work, and help reduce Federal
Reserve lending rates. It is the largest bailout in the history of the United
States. European economies likewise have announced stimulus measures in excess
of 1 trillion Euros. Chinese factories are ramping up again, backed by a $344
billion stimulus package.



In
contrast, Africa&#8217;s economies are already buckling. Global demand for oil and
gas and commodity products &#8211; the mainstays of Africa&#8217;s leading economies &#8211; has
stalled. Revenues which were already overextended have dried up and small,
medium, and large enterprises are at risk of total collapse.



Last
Thursday, the United Nations Conference on Trade and Development (UNCTAD)
estimated that the pandemic could reduce the growth of the region&#8217;s gross
domestic product (GDP) from 3.2% to 1.8% in 2020. On 27th March, The Secretary
General of the UN Antonio Guterres said: “Africa is a continent with very
little capacity to respond and I am extremely worried that in those situations,
we might have millions of cases with millions of people dying”.



Lockdowns
are not equal



Even
though the United States, Europe and many parts of Asia are better suited
economically and infrastructurally to a lockdown, they are struggling to cope
with the burden of this sudden pandemic. A situation that will likely will be
worsened by the duration and unpredictability of the pandemic.



If
these societies are struggling, the impact on Africa is best imagined.



Prior
to the crisis, 41% of sub-Saharan Africa’s population lived on less than $1.90
a day which is very little to survive on. Seven out of ten persons (70%) in
Africa are in vulnerable and precarious forms of informal employment eking
their living on a daily basis. Lockdown, homeworking and teleconferencing is
therefore not an option. Family support systems from blue and white-collar
workers and the diaspora, are themselves under threat. Job losses will&nbsp; strain these critical informal support
systems to breaking points.



 In Africa, formal social safety nets rarely exist. Therefore, stockpiling food items for extended periods of isolation is out of consideration. Linked with this, Africa requires vast food supplies to meet the needs of the continent&#8217;s poorest who can barely afford a decent mmeal. 



Recent
cyclones, Kenneth and Idai, and a&nbsp;
plague of locusts, have already put considerable pressure on&nbsp; immediate food supplies for the continent.



Which
is why an Ubuntu Plan is now critical in order to cushion the harsh
social and economic impacts of the COVID-19 pandemic in Africa. Such a plan
would include a fiscal stimulus package, the development of critical
infrastructure and support for the continent&#8217;s most vulnerable populations. 



The
fact is that in the 21st century, clean water supplies and access to
electricity are the stuff of dreams for millions of Africans. Globally, almost
800 million people are without access to clean water. Of these, 40% live in
sub-Saharan Africa.&nbsp; The simple act of
hand washing which the pandemic requires for prevention is still not possible
for millions. Linked with this, less than 58% of Africa&#8217;s population has access
to modern healthcare facilities. 



A
race against time



Africa
and its partners have already been striving hard to tackle the challenge of
eradicating poverty with measures such as the UN’s Sustainable Development
Goals, and the African Development Bank&#8217;s High5 strategy. 



The
COVID-19 pandemic however shines the spotlight on Africa’s&nbsp; poor healthcare delivery systems and
facilities and its vast challenges. Africa has one of the highest population
densities in the world. For people living in tens of thousands of informal
settlements, the idea of social distancing is inconceivable. Millions of
vulnerable low-income people live in cramped communal houses and rooms and
in&nbsp; areas that lack basic amenities,
especially water and sanitation. 



In
the short term, to effectively combat COVID-19, we urgently need self-testing
kits, personal protective equipment (PPEs), makeshift living spaces and
hospitals, recovery units and inexpensive easy-to-operate ventilators. 



The
World Health Organisation (WHO) has already issued a ten-point strategy that
calls for the creation of corridors on the continent to facilitate emergency
deployments and material shipments.&nbsp; The
plan also calls on governments and the private sector to help increase
supplies, medical equipment and care, and to strengthen surveillance and public
awareness, in order to prevent&nbsp;
continent-wide community transmission.



In
the short window available, global cooperation is imperative.



&nbsp;The African Union&#8217;s Vision Agenda 2063 and
action plan states among other things, that “We are part of the global drive
through the United Nations and other multilateral organisations to find
multi-lateral approaches to humanity’s most pressing concerns including human
security and peace, the eradication of poverty, hunger and disease &#8230;”&nbsp; 



Rethinking
the future



In
the mid to long term, we must urgently rethink social life, urban and rural
planning and our budgetary priorities, if life is to be preserved. We must&nbsp; decongest informal settlements rapidly and in
their place&nbsp; develop&nbsp; affordable housing that is suitable for
isolation&nbsp; and quarantine, in the event
of future pandemics.



There
is no better time for a globally coordinated Ubuntu Plan. To stop the
global spread of COVID-19 and its global devastation, it must be stopped in
Africa. The world must pay attention and lend a helping hand by strengthening
global cooperation, now more than ever before.&nbsp;




Ubuntu
&#8211; The preservation of human dignity, health, lives and wellbeing, demands
nothing less.

Victor

Op-Ed: Victor Oladokun on why Africa urgently needs an Ubuntu Plan

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In response to President Donald Trump&#8217;s call for a 100 basis point rate cut, CNBC&#8217;s Steve Liesman takes a look at the Fed&#8217;s response to this and the trade war between the U.S and China.

How will the Fed respond to Trump’s trade war?

Jameel Ahmad | FXTM
This week we saw new Federal Reserve Chairman Jerome Powell take the helm for his first FOMC meeting as Fed chair.  The Federal Reserve raised interest rates for the sixth time since the Federal Open Market Committee commenced raising interest rates from its record lows in December 2015, but the Rand actually strengthened in the aftermath of the decision. Does this make the Rand resilient to US interest rate increases?  What could the latest U.S central bank decision mean for the Rand and South Africa going forward? FXTM’s Global Head of Currency Strategy and Market Research, Jameel Ahmad, shares his views.
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We’ve seen it happen before; central banks build market expectations with hawkish promises and are then forced to take action to avoid causing shocks. Powell’s optimism over the U.S economy meant that investors had all but priced into the Dollar four interest rate rises for 2018.
The Federal Reserve’s hands were tied, even if inflation figures hadn’t met expectations the central bank would have had to raise interest rates this week to prevent a shock in volatility. Unfortunately for Powell, a half-hearted dovish hike wasn’t enough to convince the markets that his Fed was still hawkish on the Dollar.
Powell failed to commit to four interest rate rises for 2018, sending the USD tumbling in the process. Powell’s caution during his conference and statement was noted, he stated that economic data is not showing signs of accelerating inflation, and does not support more US interest rate rises than have already been priced in at three for 2018.
The fact that the ‘dot plot’ – the de facto forecast from which the markets take their lead – remained set at three hikes for the year also disappointed the markets, and the Dollar Index dropped to its lowest level since February 19 in early trade Thursday morning.
This is potentially good news for both the South African economy and Rand short-term. Had the Fed upgraded the dot plot to four interest rate hikes as expected, then we would likely have seen the Rand decline on Dollar strength. For an emerging market, the threat of higher interest rates typical sparks capital outflows &#8212; a weaker Dollar staves that off a little longer.
However, Wednesday’s FOMC outcome is not unlikely to keep the greenback down for long. The Fed is still relatively hawkish (if not quite aligned to market expectations) and three interest rate rises throughout the year will likely support the Dollar long-term. A strengthening Dollar could negatively impact the South African economy.
Capital outflows and a reduction in foreign investment is bad news for service industries such as retail, tourism and real estate, while a strengthening Dollar increases the cost of imports and lessens export revenue. Gold’s inverse relationship with the greenback is another bugbear.
The expectation of higher interest rates will likely reduce demand for the zero-yielding metal, driving down its value.
Of course, we’re assuming at this point that the Washington pantomime fails to influence the greenback long-term. With trade war fears threatening escalation and three investigations into Russian collusion currently live, the Dollar has a rocky road ahead of it in 2018.
Even if the African continent seems isolated away from the threat of a Trump trade war, it doesn’t mean that the Rand will not feel the brunt of market uncertainty. Concerns that President Trump is set to intensify his tariffs against China in the coming days and weeks are likely to keep investors on edge. Any signs of sudden selling pressure in the stock markets is going to risk hurting appetite towards emerging assets, like the Rand.
A Trump trade war is not seen as positive for emerging market currencies and could derail the recovery in the Rand, which currently stands at 4.40% year-to-date.

What does Powell’s Fed have in store for the rand?

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The bounce in Treasury yields witnessed after the election of <a href="http://www.cnbc.com/donald-trump/" target="_self">Donald Trump</a> is now decaying in the D.C. swamp. If the <a href="http://www.cnbc.com/id/43752521" target="_self">Federal Reserve</a> continues to ignore this slow growth and deflationary signal from the bond market and continues along its current rate hiking path, the yield curve will invert by the end of this year and an equity market plunge and a recession is sure to follow.
<a class="inline_asset" title="http://www.investopedia.com/terms/i/invertedyieldcurve.asp?lgl=myfinance-layout-no-ads" href="http://www.investopedia.com/terms/i/invertedyieldcurve.asp?lgl=myfinance-layout-no-ads" target="_self">An inverted yield curve</a>, which has correctly predicted the last seven recessions going back to the late 1960s, occurs when short-term interest rates yield more than longer-term rates. Why is an inverted yield curve so crucial in determining the direction of markets and the economy? Because when bank assets (longer-duration loans) generate less income than bank liabilities (short-term deposits), the incentive to make new loans dries up along with the money supply. And when asset bubbles are starved of that monetary fuel they burst. The severity of the recession depends on the intensity of the asset bubbles in existence prior to the inversion.
The Fed has traditionally controlled overnight lending rates between banks. That all changed when the Fed started to buy longer-term Treasurys and mortgage backed securities as a result of the Great Recession. Nevertheless, outside of these quantitative easing programs, the long end of the yield curve is primarily influenced by the inflationary expectations of investors. The yield curve inverts when central banks believe inflation is headed higher; but bond investors are convinced of the opposite.
<div id="inline_movable_ad"> The last two times the yield curve inverted was in the years 2000 and 2006. The inversion and subsequent recession that began in the year 2000 caused NASDAQ stocks to plummet 80 percent. The following inversion caused the Great Recession in which the S&amp;P 500 dropped 50 percent and, according to the Case/Shiller 20-City Composite Index, home prices fell over 30 percent.</div>
This next inversion will occur in the context of record high equity, real estate and bond market valuations that will require another government bailout. However, this time around the recession will commence with the balance sheets of the Fed and Treasury extremely overleveraged right from the start.
As you can see from the chart below, if the 10-year note yield (orange line) continues to fall along its current trajectory; and the Fed plods along with its avowed Dot Plot hiking path (blue line), the yield curve should invert around the end of 2017. Market chaos and another brutal recession should soon follow.
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What could prevent this baneful scenario from happening?
One of the most popular Wall Street myths is that long-term interest rates rise simply because the Fed is raising the Fed Funds Rate (F.F.R.). This normally occurs because the central bank is trying to catch up to rising inflation and is initially behind the curve. However, later on in the tightening cycle long rates begin to decline as inflation is stamped out of the economy.
For example, from June 2004 thru June 2006 the Fed raised the F.F.R. from 1 percent-5.25 percent; but the 10-year note only increased from 4.7 percent-5.2 percent. That means the benchmark note went up just 50 basis points even though the F.F.R. was raised by 425 basis points. What is especially notable here is that GDP growth was well above 3 percent in both 2005 and 2006; as opposed to today&#8217;s environment of 1.6 percent GDP growth for all of 2016, and just 1.2 percent in the first quarter of 2017. The fear of recession and deflation is the primary reason why the 10-year note yield is currently falling.
The Fed has been tightening monetary policy since it started to taper its $80 billion per month quantitative easing program back in December 2013. It has subsequently raised rates three times and is now most likely already ahead of the curve due to the anemic state of the economy. But, as always, the Fed fails to read the correct economic indicators and is now fixated on the low unemployment rate and its dubious effect on inflation.
Some argue that the yield curve won&#8217;t invert if economic growth stalls because the Fed will then truncate its rate hike path. And indeed there is a lot of evidence for the second quarter recovery narrative to be proven false. For instance, April data on existing home contract closings declined 2.3 percent month over month, to a 5.57 million annual rate versus a forecast of 5.65 million. And new homes weren&#8217;t much better as single family home sales declined 11.4 percent to 569,000 annualized vs. the 610,000 forecast. Pending home sales also disappointed falling 1.3 percent. Then we had durable goods falling 0.7 percent, and core capital goods orders showed no growth at all.
These data points highlight the reality that the second quarter will not spring higher from the anemic first quarter growth rate. But the problem is that the F.F.R. is already close to 1 percent. Therefore, even if we get just two more hikes before the Fed realizes growth is faltering, that rate will be near 1.5 percent. If the economy slows enough that even the Fed takes notice, the 10-year note yield should retreat back to where it was in July of 2015 (1.35 percent). In this second scenario, the yield curve inverts despite the Fed&#8217;s failure to consummate its dot plot plan.
Of course, there is a small chance that the yield curve doesn&#8217;t invert due to an aggressive reverse QE program&#8211;a very quick unwinding of the Fed&#8217;s $4.5 trillion balance sheet. While this may avoid an inversion of the yield curve, it would also siphon off capital from the private sector, as investors divert yet more money to the Treasury.
An aggressive selling of the Fed&#8217;s balance sheet is a very unlikely scenario given the minutes of the May Federal Open Market Committee meeting. In that meeting the Fed decided to merely taper the re-investment of its balance sheet, which is the pace in that it stops reinvesting its assets. With a total debt to GDP ratio of 350 percent, this third scenario has very low odds of occurring; but should remand the economy into a recession even if such a plan is deployed.
Therefore, the only rational way to avoid an inverted yield curve, market chaos and a recession is if long-term Treasury yields reverse their long-term trend lower due to a rapid increase in GDP growth. This would only occur if Trump&#8217;s agenda of repatriation of foreign earnings, tax cuts and infrastructure spending is imminently adopted. But the probability of this happening very soon is getting lower by the day.
An inverted yield curve will lead to market disorder as it did in 2000 and 2006. But this next recession starts with our national debt over $20 trillion dollars and the Feds balance sheet at $4.5 trillion. Therefore, when the yield curve inverts for the third time this century you can expect unprecedented chaos in markets and the economy to follow shortly after. This is because the yield curve will not only invert at a much lower starting point than at any other time in history but also with the Fed and Treasury&#8217;s balance sheets already severely impaired.
There will be unprecedented volatility between inflation and deflation cycles in the future due to these factors. This represents a huge opportunity for those that can identify these inflexion points and know where to invest. To be more specific, sell your long positions and get short once the curve inverts; and then be prepared to hedge against inflation when the Fed responds with helicopter money.
Commentary by Michael Pento, the president and founder of Pento Portfolio Strategies. He is also author of the book, &#8220;<a class="inline_asset" href="http://www.amazon.com/Coming-Bond-Market-Collapse-ebook/dp/B00C42S5KE/ref=sr_1_1?s=books&amp;ie=UTF8&amp;qid=1368206596&amp;sr=1-1" target="_blank" rel="noopener noreferrer">The Coming Bond Market Collapse</a>,&#8221; and produces the weekly podcast, &#8220;<a class="inline_asset" href="http://pentoport.com/blog/subscription/" target="_blank" rel="noopener noreferrer">The Mid-week Reality Check.</a>&#8220;
Follow CNBC&#8217;s Opinion section on Twitter <a class="inline_asset" href="http://www.twitter.com/CNBCopinion" target="_blank" rel="noopener noreferrer">@CNBCopinion</a>.
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Op-ed: This market indicator has predicted the past 7 US recessions. Here’s what it’s signalling now

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Federal Reserve officials, amid signs that the U.S. economy soon could shed its long period of stagnation, approved the first interest rate hike in a year Wednesday and said it foresees three more increases next year.
The <a href="http://www.cnbc.com/2016/12/14/us-stocks-open-slightly-lower-as-fed-announcement-approaches.html" target="_blank">stock market reacted calmly</a>, while bond yields and the dollar rose. The yield on 2-year Treasurys hit its <a href="http://www.cnbc.com/2016/12/14/bond-investors-await-fed-decision-data-in-focus.html" target="_blank">highest level in since August 2009</a>. The rand one of the ten most traded currencies in the world fell more than two per cent to 14 to the dollar. 
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<div class="teads-ui-components-label">The Federal Open Market Committee raised its target range from a range of 0.25 percent to 0.5 percent to 0.5 percent to 0.75 percent. The overnight funds rate currently sits at 0.41 percent.</div>
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The committee also approved a quarter-point increase in the discount, or primary credit, rate, from 1 percent to 1.25 percent.
The decision was unanimous. Previous meetings had featured dissents from as many as three members who felt the Fed should resume a rate-hiking cycle it began in December 2015.
In addition to approving the much-expected increase, the FOMC also indicated a higher rate than projected back in September when it last released the quarterly look ahead. The committee now expects three rate hikes in 2017, two or three in 2018 and three in 2019.
In effect, the Fed added one more hike during the entire period, with the longer-run target up to 3 percent from 2.9 percent.
&#8220;What they did was highly anticipated. There was a slight surprise in next year, looking at an additional rate hike,&#8221; said Myles Clouston, senior director of Nasdaq Advisory Services. &#8220;Overall, the Fed remains pretty steady overall, looking at gradual raises in interest runs in the long run.&#8221;
The closely watched dot-plot also indicated a somewhat more ambitious future for hikes.
However, the committee continued to emphasize in its post-meeting statements that the path higher will be &#8220;gradual.&#8221; It also stuck with language indicating that risks to the Fed&#8217;s forecasts remain &#8220;roughly balanced,&#8221; and emphasized that future moves will be data-dependent rather than subject to a set schedule.
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<div class="attribution">The increase came with projections that economic conditions are changing.</div>
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On inflation, the committee said market-based measures remain low but have moved up &#8220;considerably,&#8221; a word that was omitted from the November statement.
On the jobs market, Fed officials indicated that full employment is getting closer.
&#8220;The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation,&#8221; the statement said.
That differed from November, when they included the more definitive &#8220;supporting further improvement in labor market conditions&#8221; language. There has been considerable discussion within the Fed about how close the labor market is to full employment, and this week&#8217;s developments indicate that officials believe that condition is getting closer.
The move came with an incrementally more upbeat look at the economy. This week&#8217;s statement said &#8220;economic activity has been expanding at a moderate pace since mid-year,&#8221; an upgrade from November&#8217;s assessment that growth had &#8220;picked up from the modest pace seen in the first half of this year.&#8221;
Committee members lifted their expectations for GDP growth from 1.8 percent in 2016 to 1.9 percent, and 2.1 percent in 2017 against the previous estimate of 2.0 percent. However, 2018 remained at 2.0 percent while 2019 also was bumped up a notch, from 1.8 percent to 1.9 percent. The longer-run GDP projection remained at 1.8 percent.
Headline inflation expectations were little changed overall, with 2016 moved up from 1.3 percent in September to 1.5 percent in Wednesday&#8217;s projections, but the longer-run outlook remained at 2.0 percent.
The Fed last hiked rates almost a year ago to the day — Dec. 16, 2015, to be exact — during a decidedly different time for the economy. GDP growth for the fourth quarter of 2015 was just 0.9 percent, and it was far from certain that inflation was heading toward the central bank&#8217;s 2 percent target.
Markets initially welcomed the news then but then nose-dived, sending major stock averages just short of bear market territory in what would become a topsy-turvy year for geopolitics and growth.
A year later, things have changed significantly.
The economy has continued to trek toward full employment, with the jobless rate currently at 4.6 percent. Most inflation measures show the trend much closer to the Fed&#8217;s benchmark as well.
The Dallas Fed&#8217;s one-month trim mean inflation rate, for instance, is now at 2.1 percent.
Despite the Fed&#8217;s tepid optimism, there is a growing feeling on Wall Street that growth both in GDP and inflation could surprise higher. For instance, <a href="http://www.cnbc.com/2016/12/14/economist-ken-rogoff-sees-significantly-faster-growth-under-trump.html" target="_blank">Harvard economist Ken Rogoff said this week that economic gains under President-elect Donald Trump</a> could be &#8220;significantly faster&#8221; than have been the case during the post-recession period.
&#8220;What&#8217;s more interesting is what&#8217;s going to happen next year,&#8221; said Ed Keon, portfolio manager and managing director at QMA. &#8220;With the pro-growth agenda of the Trump administration, how will the Fed react to that?&#8221;
Trump&#8217;s victory has brought with it hopes that fiscal loosening in the form of perhaps $1 trillion in infrastructure spending will spur growth. The stock market has posted a powerful rally during the postelection period, bringing with it a sharp climb in government bond yields.
Economic indicators have picked up in recent months, though news Wednesday that inventories declined dampened expectations for the fourth quarter. The Atlanta Fed now believes fourth-quarter growth will be 2.4 percent, down from 2.6 percent last week, and several other economists also pared back expectations for the current period.
The December 2015 hike was FOMC&#8217;s first hike in more than nine years. The committee took the rate to zero during the financial crisis in 2008.﻿
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Fed hikes rates, warns of 3 more to come in 2017, rand dives

Gold was on track for its biggest monthly decline since June 2013, largely pressured by an imminent U.S. interest rate hike by the Federal Reserve in December on expectations of improving economic growth.
Spot gold on Wednesday was nearly unchanged at $1,188.86 an ounce by 0627 GMT. U.S. gold futures were flat at $1,187.90 per ounce. Spot gold was down 6.83 percent so far this month.
Bullion has lost $150 from a Nov. 9 post U.S. election high of $1,337.40 per ounce, hurt by a rally in the U.S. dollar on surging Treasury yields as investors believed President-elect Donald Trump&#8217;s policies would invoke faster inflation.
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&#8220;Markets seem to accept Trump as good for business,&#8221; said Joshua Rotbart, managing partner at Hong Kong-based bullion services provider J. Rotbart &amp; Co.
&#8220;His statements about increasing investments in infrastructure, tax reform aimed at strengthening local businesses and import reforms to prioritize local businesses have increased growth expectations,&#8221; he added.
&#8220;This has triggered a risk-on trend which has seen cash flows from gold-backed securities to risky assets like equities.&#8221;
The dollar on Wednesday edged up as U.S. debt yields resumed ascent. [USD/] [US/]
The U.S. economy grew faster than initially estimated in the third quarter, notching up its best performance in two years, buoyed by strong consumer spending and a surge in soybean exports.
The case for raising U.S. interest rates has &#8220;clearly strengthened&#8221; since early November, before Americans elected Republican Donald Trump as president, Federal Reserve governor Jerome Powell said on Tuesday in the latest signal that a policy tightening is imminent.
Gold is highly sensitive to rising rates, which lift the opportunity cost of holding non-yielding assets such as bullion, while boosting the dollar, in which it is priced.
Oil markets were jittery on Wednesday ahead of an OPEC meeting later in the day, with members of the producer cartel trying to thrash out an output cut to curb oversupply. [O/R]
&#8220;The impact of an OPEC deal on gold would be tricky to assess,&#8221; said Edward Meir, an analyst with INTL FCStone.
&#8220;A failure by OPEC to agree on a credible cut will send oil prices sharply lower and possibly drag gold down with it. However, we could see the dollar weaken as a result of oil selling off and this could boost gold,&#8221; Meir said.
Silver rose 0.6 percent to $16.67 an ounce.
Platinum was up 0.2 percent at $919.60.
Palladium edged up 0.1 percent to $760.70 It rose to a 1-1/2-year high of $766.20 on Tuesday. Palladium has risen over 23 percent this month, its best since February 2008, outperforming other metals.﻿

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