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The Fed’s failure to raise rates is a mistake says ETF Securities

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Holding back from further rate hikes is a mistake on the part of the US Federal Reserve says ETF Securities. After raising rates for the first time in nine years, the Fed has held back from further hikes in 2016, bowing to market tantrums, the firm says. 

The Fed is struggling to focus on the strength of domestic fundamentals such as the strong labour market or increasing inflationary pressures and is reluctant to move too far from other central banks that are still in easing mode. James Butterfill, Head of Research and Investment Strategy at ETF Securities says: “The risk of waiting too long to raise rates is greater uncertainty. Such a situation seems circular, with markets fretting over Fed decisions and the Fed concerning themselves with market volatility – an issue outside the scope of its mandate.”
 
“Real GDP trends indicate that the pace of US economic growth is solid. While the growth path of real GDP is not as strong as pre-crisis levels, there is no evidence of a slowdown. Such a growth path warrants tighter monetary policy. Without a monetary check on inflationary pressures, even a gradual one, expectations threaten to become unanchored, something that only aggressive rate hikes can then cure. We believe that the current guidance on rate hikes will be insufficient to rein in prices and could lead to the Fed having to tighten more aggressively later in the cycle. This could lead to further unintended consequences.”
 
 Key trends highlighted by the firm include a belief that a global economic recovery is likely to provide a tailwind for industrial precious metal prices (silver, platinum, palladium). “Part of the reason that these industrial precious metals have been falling since 2011 is due to China’s moderating demand, as it adjusted to a slower pace of economic growth. However silver, platinum and palladium have started to recover this year, rising 14 per cent, 11 per cent and 7 per cent respectively and we expect demand for these metals will likely continue as China’s industrial output appears to have found a base,” the firm says.       
 
“Furthermore, all three of these metals have been in a supply deficit during the past three years. 80 per cent of platinum and close to 40 per cent of palladium are produced in South Africa and as the Rand depreciation abates and miners cut back on activity, supply deficits for these metals are likely to grow.” 
 
Central bank policy remains a supportive influence on gold, the firm says. “Along with the Swedish Riksbank, Danish National Bank, Swiss National Bank and the Bank of Japan, the ECB has adopted a policy of negative interest rates (NIRP). We argue that NIRP, whether in nominal or real terms, is positive for gold prices. Historical data suggest that there is a relationship between negative interest rates and the gold price. Gold has risen more than 15 per cent year-to-date and is likely to rise further as US inflation increases.”
 
 

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