negative rates

If reading financial markets is usually as inscrutable as reading tea leaves, bond investors have decided now is the time to send a message in big, bold letters. They want […]

A latest Bloomberg survey shows economists expect Swiss National Bank (SNB) to raise rates only after the European Central Bank (ECB) begins tightening cycles. Thus, SNB is not seen raising rates before the fourth quarter of 2019.

The majority of market observers presently consider it a foregone conclusion that the Fed will raise interest rates by 25 bps in December and arrive at a base rate of 1.25% to 1.50%. At the same time QT (Quantitative Tapering) is supposed to be progressing at US$ 10 billion monthly. More rate hikes are expected in 2018. As in the past such a Fed policy will probably result in a recession as higher interest rates and tightened credit will slow down growth.

Recent moves by the U.S. Federal Reserve to tighten its monetary policy is helping the Swiss National Bank in its campaign against the “highly valued” Swiss franc, SNB Governor Andrea Maechler said on Thursday.

Interest rate rises announced by the Fed “mean the interest rate differentials between Switzerland and other countries may widen further in the future,” Maechler said. This would make the Swiss franc less attractive to investors, reducing the value of the currency, whose strength has hampered Switzerland’s export-reliant economy.

Switzerland’s central bank on Thursday softened its longstanding warning about the strong franc but still said that it was "highly valued, " suggesting Swiss officials aren’t fully satisfied yet with the franc’s weakening against the euro.

"The Swiss franc nevertheless remains highly valued, and the situation on the foreign exchange market is still fragile," the SNB said in a statement after its quarterly policy review.

The Swiss franc’s recent weakening against the euro is a positive development but the trend was “fragile”, Swiss National Bank governing board member Andrea Maechler said on Thursday.

“Overall, the trends are pointing in the right direction for the Swiss franc, but it is too early to say whether these trends are sustainable,” Maechler told an economic conference in Yverdon-Les-Bains.

Investors currently face great difficulty in trying to limit risk while desperately searching for higher yields. ZIRP and NIRP have made bonds uninteresting even as central banks continue buying up what is available on the market with the result that yields are kept artificially low. Central bank acquisitions on the stock market have pushed equity prices so high that new records have been set. David Stockman is correct in asserting that price discovery has been eliminated.

The Fed has invoked 2% as the magic number for inflation but claims that its goals have not been reached even though the economy is doing well and, therefore, interest rate hikes are justified. Inflation statistics depend on where one looks for inflation and the weighting given to different components. It is obvious that statistics can be manipulated and, unsurprisingly, consumer price inflation in the US is low, under 2%. Workers consequently do not have the argument of high inflation to justify requests for pay rises.