Inflation reaches key threshold for Fed rate hikes

01 May, 2018, 15:11 | Author: Sally Reid
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Excluding the volatile food and energy sectors, the price index jumped 1.9 percent in the 12 months through March.

The greenback had risen 2 percent in April, its biggest monthly gain since November 2016, after the USA 10-year Treasury yield climbed above the psychologically significant 3.0 percent threshold to four-year highs last week. The Federal Open Market Committee considers 2 percent the ideal inflation mark, because it's typically a key indicator of strong economic health.

The dollar rose after the Commerce Department said year-over-year inflation hit the Federal Reserve's 2% target for the first time in over a year in March, a sign of strengthening US inflation pressures that could encourage the Fed to continue lifting interest rates this year.

Even with the Fed's preferred price measure hitting its target, central bankers are likely to react with restraint and stick to their plan for gradual interest-rate hikes, though the trend could nudge them toward four increases this year.

Investors should be prepared for a higher inflationary environment and can utilize targeted ETF strategies to hedge against the negative effects of inflation.

"Economists expect the economy added 185,000 jobs in April, a rebound from March's disappointing headline jobs gain while the unemployment rate is expected to drop to 4% after it held at 4.1% for a sixth-straight month in March", according to Yahoo Finance.

The Fed is aiming to raise interest rates quick enough to prevent inflation from spiking, but slow enough to allow the economy to grow at a stable level.

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Annual inflation readings in March of a year ago were held down by large declines in the price of cell phone service plans.

Relatively solid Canadian inflation data has also kept Canadian Dollar investors optimistic.

At 8:56 a.m. (1256 GMT), the 10-year inflation breakeven rate, or the yield gap between 10-year Treasury Inflation Protected Securities and regular 10-year Treasury notes, was 2.17 percent, down 0.05 basis point from late on Friday, Tradeweb data showed.

The greenback climbed to a 2-1/2-month high of 109.540 yen on Friday as long-term USA yields rose. The government reported last Friday that wages and salaries recorded their biggest increase in 11 years in the first quarter.

The department said Friday the USA economy grew by 2.3 percent during the first quarter of this year - a slower pace than the previous quarter. The data was included in last Friday´s advance first-quarter gross domestic product report.

The euro was almost flat at $1.2075 after slipping 0.4 percent overnight and approaching $1.2055, the 3-1/2-month low set on Friday. There were also increases in purchases of recreational goods. Personal income rose 0.3 percent in March after increasing by the same margin in February.

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