How will the Fed contend with rising US borrowing costs?

How will the Fed contend with rising US borrowing costs?

Minutes from the Federal Reserve’s most recent meeting on monetary policy will be released on Wednesday, giving investors further insight into continuing debates at the central bank about the trajectory of the economic recovery and the recent rise in US borrowing costs.

The March meeting took place against a much-improved economic outlook. The $1.9tn stimulus programme passed by the Biden administration prompted a rethink about the recovery’s pace, with economists moving their growth and inflation forecasts substantially higher.

These revisions damped investors’ appetite to hold US government bonds, sending prices lower. Yields, which rise as prices fall, have surged higher, with the benchmark 10-year note now trading about 0.1 percentage point below its 14-month high of 1.78 per cent. 

As well as potentially providing greater detail about the Fed’s sensitivity to the rise in borrowing costs, the minutes could reveal some insight on plans to lift rates from their record low levels.

The central bank published its “dot plot” of interest rate projections last month, and while it signalled it would not raise rates until at least 2024, more officials have pencilled in earlier interest rate increases than at the December meeting.

The timing will depend chiefly on the path forward for growth and inflation, especially given the Fed’s newfound commitment to let inflation run above its longstanding 2 per cent target. 

“The amount of fiscal stimulus absolutely increases the risk of a breakout in inflation . . . but we’ve also gone through an extremely long period of time where it has been very difficult for the Fed to even achieve its inflation target,” said Greg Wilensky, head of US fixed income at Janus Henderson.
Colby Smith

How strongly will the UK economy rebound? 

The UK services sector, hobbled by coronavirus-induced lockdowns over most of the past year, is expected to show a strong uptick in activity for March, building on earlier estimates and raising hopes for an even brighter April.

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IHS Markit’s final services purchasing managers’ index figures for March, released on Wednesday, arrive just days before the reopening on April 12 of non-essential stores, personal care services, indoor sports centres and outdoor areas at hospitality venues such as bars, pubs and restaurants across England. Services account for about 80 per cent of the UK economy.

The latest figures — set to mirror upward trends across non-standard economic measures — follow a sharp decline in January and a recovery in February during England’s third lockdown.

In March, visits to retail and recreation venues rose to half the average of February 2020 levels, from 63 per cent below average in January, according to Google Mobility data. This is in line with upswings in credit and debit card spending published by the Office for National Statistics over the same period.

Line chart of % change compared with average of Jan 3 and Feb 6* showing Mobility to UK retail and recreation hubs on the rise

The consumer-driven economic recovery expected in the spring is being supported by an unprecedented amount of household savings accumulated during the pandemic, said Howard Archer, chief economic adviser at UK economic forecasting group EY Item Club.

He also pointed to a jump in consumer optimism from the speedy Covid-19 vaccine rollout and the government’s announcement in late February of the reopening road map.

“On top of that, the labour market is proving more resilient than had looked likely at the start of the year,” said Archer. “We are set to appreciably raise our current GDP growth projection of 5 per cent for this year.” 
Valentina Romei

Can the gold price recover?

Gold has had its worst quarter since the final three months of 2016, falling 10 per cent after investors lost their enthusiasm for the precious metal. 

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This year’s drop came as rising bond yields and expectations of a pick-up in US economic growth on the back of the $1.9tn stimulus plan made other assets more attractive. 

Higher bond yields dull the appeal of gold because the metal provides no interest payments. Treasury yields have soared this year.

At the same time, Covid-19 vaccinations are stoking hopes of a global economic recovery, which has boosted stock markets. That has dented gold’s allure as a haven asset.

“We expect a further fading of safe-haven demand over the course of this year, which should weigh on [gold] prices,” said Carsten Menke, head of research at Julius Baer.

Gold touched $1,678 an ounce last week, just above its low of the year of $1,677 an ounce on March 8. It finished last week around $1,730.

Adrian Ash, head of research at precious metals online retailer BullionVault, cautioned it was natural for gold to relinquish some of its gains after a very strong year in 2020. Gold hit a record high above $2,000 an ounce in August due to a surge in buying of gold-backed exchange traded funds. 

Investors might also be too optimistic about the end of the pandemic, Ash added, which meant gold could still play a role as a form of protection for investors.

“The markets are racing to say it is over — frankly, it isn’t,” he said. 
Henry Sanderson



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