Fed Likely to Stay on Target for Next Year’s Rate Hike

A sturdy U.S. recovery is expected to trump global economic worries as the Federal Reserve concludes its last policy meeting of 2014 on Wednesday, with officials likely to signal they are still on track to raise interest rates next year.

With oil prices in freefall, Japan in recession and the euro zone sputtering, the Fed for a second consecutive meeting will weigh the U.S. economy’s apparent strength against overseas risks that now include a potential currency crisis in oil exporter Russia.

Investors continued looking for safe haven assets in light of Russia’s turmoil as Fed officials met for a second day, while fresh data confirmed an expected softening of U.S. inflation.

U.S. consumer prices fell O.3 percent in November, led by the largest decline in gasoline prices since December 2008.

Fed officials have expected a temporary softening of inflation given the big plunge in oil prices, but have indicated signs of strength in the job market elsewhere have left them confident U.S. wages and prices will eventually start to rise.

In addition, the drop in oil prices cuts two ways – threatening economies like Russia that depend on oil exports while providing a boon to consumers. For the United States, lower oil costs are considered an overall plus in the long run, even though they pose an immediate drag on inflation and may trim jobs and investment in the energy industry.

“Russia is going to have absolutely no influence on the Fed whatsoever,” said Paul Ashworth, chief U.S. economist for Capital Economics. “The collapse in oil prices is unambiguously good for the U.S. economy.”

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza