U.S. Federal Reserve Chair Janet Yellen holds a press conference following the two-day Federal Open Market Committee (FOMC) policy meeting in Washington 16 March, 2016 - REUTERS 

Reuters: Federal Reserve policymakers urging caution over interest rate hikes have gained the upper hand in the central bank’s internal debate, but the risk for the U.S. economy is that they are wrong to downplay a recent rise in inflation.

In words that echo those of colleagues on the Fed’s dovish wing, Fed Chair Janet Yellen told a news conference on Wednesday that “caution is appropriate” when it comes to raising interest rates. She said she was not convinced underlying inflation had accelerated.

If Yellen is right, financial markets have ample warning for the gradual pace of rate hikes she said was likely.

But many private economists buy into the argument by an opposing faction within the Fed that U.S. inflation is indeed stirring.

They point to a range of recent data to back their view, including a reading Thursday showing underlying U.S. inflation rose 2.3% in the 12 months through February, the biggest increase in more than three years. The Fed’s target is 2% inflation.

Faster price gains would likely trigger more aggressive rate hikes which Yellen in the past has warned could cause a recession.

“If we got to a point where the Fed had to raise (rates) quickly, it could be very destabilizing,” said Northern Trust economist Carl Tannenbaum, formerly an economist at the Chicago Fed.

Yellen’s comments sounded much like those of a vocal faction of Fed policymakers, led by Governor LaelBrainard, who have argued publicly that the global economic slowdown could knock the U.S. economy off course. Brainard just last week counseled against assuming that a tighter labor market would boost inflation.

However, the chair’s assessment that inflation may not yet have turned the corner to a more healthy trajectory runs counter to the view of Fed Vice Chairman Stanley Fischer, who warned this month that faster inflation might well be stirring.

If Fischer is right, Fed Chair Janet Yellen may have to change her tone as soon as the next policy meeting in April.

“Yellen will have a noticeable faction of the committee that’s anxious to tighten again,” said David Stockton, the Fed’s former research director who is now a fellow at the Peterson Institute for International Economics. “They will need to be persuaded that the process is still in place, that this is not an indefinite pause.”

After Wednesday’s decision and fresh forecasts from the Fed that showed most officials prefer just two rate hikes this year, investors and economists dialled back their own rate hike expectations, with traders of interest-rate futures now seeing no rate rise before September.

The Fed raised its benchmark interest rate by a quarter of a percentage point in December, the first time it lifted rates in nearly a decade. Its target now stands as between 0.25 and 0.50%.

With the market view for just one rate hike this year at odds with the Fed’s view that at least two will be needed, Yellen could find herself in a box particularly if global markets remain relatively calm and threats to the United States dissipate.

“This could reinforce the market’s belief that a dovish Fed is not all that interested in walking the talk, and when the June (Fed) meeting comes around skepticism could still reign” said Scott Anderson, chief economist at Bank of the West.

Asia jumps as cautious Fed lifts risk appetite, dollar on defensive

Reuters: Asian shares gained across the board on Thursday as risk appetite revived after the Federal Reserve reduced the number of interest rate hikes expected this year, while the dollar nursed substantial losses.

Spreadbetters saw the upward momentum for equities being retained in Europe, forecasting a higher open for Britain’s FTSE, Germany’s DAX and France’s CAC.

The potential for more money to continue flowing into commodities and equities, rather being lured by higher US interest rates, boosted crude oil and emerging market stocks.

MSCI’s broadest index of Asia-Pacific shares outside Japan climbed to a two-month high and was last up 1.9%.

Australian stocks added 1%, South Korea’s Kospi rose 0.9% and Shanghai was up 1%. Japan’s Nikkei pared earlier gains and fell 0.6% as the dollar slipped versus the yen.

Asian equities took their cue from Wall Street, where the S&P 500 closed at its highest level this year following the U.S. central bank’s cautious message. 

Gold climbs as Fed cuts outlook for interest rate rises

Reuters: Gold climbed on Thursday, extending a 2.5% rally made in the previous session after the Federal Reserve cut the number of interest rate rises it forecasts for this year, sending the dollar sharply lower.

The U.S. Central Bank held interest rates steady and indicated that it would tighten policy this year, but fresh projections showed policymakers expect two quarter-point increases by year-end, half the number forecast in December.

Spot gold was up 0.3% at $1,265.81 an ounce at 1225 GMT, while U.S. gold futures for April delivery were up 3% at $1,266.80.

“There has been a general tendency for gold to react in a Pavlovian manner to every announcement from the Federal Reserve, with the price firming on any failure to raise rates, so the initial jump is not too surprising,” Glaux Metal Consultant David Jollie told the Reuters Global Gold Forum on Thursday.

“I also think we shouldn’t expect too much strength immediately after this announcement, since not that many people thought rates would rise again at this point. They key questions are rather what is going to happen to inflation and when might rates rise later this year.”

Gold has climbed nearly 20% since the end of last year as investors scaled back their expectations that the Fed would continue to push rates higher after December’s first increase in nearly a decade.

Rising rates tend to pressure gold by lifting the opportunity cost of holding non-yielding bullion while boosting the dollar, in which it is priced. The dollar slid 1.2% against a basket of currencies on Thursday.

While that is supporting gold, it has failed to revisit last week’s 13-month high of $1,282.51 an ounce. Further gains could prove elusive without further stimulus, analysts said.

“Gold has already rallied more than $200 an ounce since hitting cycle lows in December, and arguably the ceiling for gold may be approaching,” HSBC said in a note.

“The Fed projections may only be conforming to what many in the market already assumed. This could limit further gold gains. That said, the dovish tilt in the Fed’s policy statement should be enough to reaffirm and galvanize the gold rally.”