FOMC Member Dudley Hopeful

Despite the number of downside risks New York Fed President Dudley mentioned during the Q&A session following his remarks, he remains hopeful that the Federal Reserve will raise interest rates in 2015, effectively diminishing the probability of a September hike. According to Dudley “the case for September rate hike [is] less compelling.” Citing international developments in particular, Dudley was concerned about the potential for these events to tighten liquidity conditions further, a problem that might be exacerbated by the FOMC choosing to hike rates. When it came to inflation, he was fairly upbeat and optimistic, expected the impact from lower oil prices and the higher US dollar to be temporary dislocations instead of long-term trends. The one surprising comment was the dismissal of increased asset purchases, stating “we are a long way from additional quantitative easing.” The dollar managed to book further gains on the comments, pushing gold prices back below the key $1132 level.

As markets begin to digest China’s latest policy shifts and US policymakers discuss the viability of interest rates rising in the short-term, a rebound in risk assets is underway as evidenced by the rally in equity benchmarks that began with the extraordinary gains in US indices. The Nasdaq Composite surged 4.24% during the cash equity session, leading peers to the upside. The rally comes amid one of the worst two week losing streaks in years as value investors came off the sidelines in a buying frenzy. Volatility continues to be high as evidenced by the substantial intraday swings evident across asset classes as the VIX Volatility Index remains elevated despite a near -16% slide yesterday. Chinese stocks are trading back in positive territory, bouncing over 4% in some cases with the Shanghai Composite up just over 3%. European futures are pointing to a higher open, carrying over the strength from the Asian session.