Some Fed Participants Concerned About Low Inflation

Both the Dow Jones and S&P 500 were up 0.18% overnight with both at a new record high. The main event of the night was the release of the minutes from the most recent FOMC meeting. After September’s Fed meeting the odds of a rate hike in December were as high as 92% according to the CME Fedwatch tool. The minutes, however, revealed that some FOMC members are concerned that the current low inflation is not transitory and may therefore be a problem for the Fed’s plans to continue raising rates (higher rates will tend to put downward pressure on inflation). As a result, the odds for a rate hike in December have dropped slightly to around 87%. The next CPI data will be out on Friday but it will be distorted by the effects of the hurricanes that recently made landfall in Texas and Florida.  

Gold was weaker leading into the FOMC minutes but the discovery that some members are concerned about low inflation led to a decent rally that pushed gold above US$1,290 per ounce. Conversely, the US dollar index sold off after the release of the minutes and then continued the downward trend that had persisted earlier in the day. As a result, the Australian dollar price of gold approached a one month high and is currently trading at AU$1,658.

The Fed has started allowing its bond portfolio to roll-off (i.e. it is not reinvesting the proceeds of maturing bonds) to the tune of $10bn per month. So far, bond yields have only increased slightly since the start of the roll-off at the beginning of October, however they did have a significant run-up in the latter half of September. The US 10-year yield is currently at 2.35%, lower than the one year high of 2.62% but significantly above Septembers low of 2.04%.

The ASX 200 had another strong day yesterday, closing 0.6% higher and bringing it towards the resistance level of the four-month trading range that we have been stuck in.  

Data Releases:

–    US PPI 11:30am AEDT

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This article was written by William O’Loughlin – Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via william.oloughlin@rivkin.com.au or by phoning +612 8302 3633.