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United States: What’s the fixation on inflation
United Kingdom: Retails sales increase in November
Eurozone: German business confidence improves

Good morning,

After Wednesday’s FOMC meeting, the latest Reuters poll shows that 24 out of 43 economists are projecting the first rate hike in the US by June of next year. The futures market is pricing lift-off by September. Citi’s latest analysis puts it in December. And all of these forecasts are running way behind the so-called Taylor Rule, which suggests that the Fed Funds rate should already be at 1.5%.

In fact, the US economy can easily handle non-zero short-term rates at this point. The banking system is healthy and can easily manage funding costs of 1.5%. Corporate borrowers can deal with slightly higher rates as well. And as far as mortgages are concerned (the higher short-term rates extends to longer maturities), payments become prohibitive at 5% vs. 4%.

But my question is always, if there’s no inflation and there’s a massive current account surplus in China, why should rates be higher than where they are now?

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Global Macro-Daily Note 19th December 2014

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