The Only Way Is Up?
It seems like we’ve been talking about the possibility of the Federal Reserve raising interest rates forever. In reality we’ve only been discussing it since last December, when the Fed made the decision to hike rates for the first time since 2006.
At the time the FOMC (Federal Open Market Committee) made the decision to lift rates by 0.25%, and on the day that it rolled out the markets reacted favorably. Arguably, since that decision has been made the US economy has been getting stronger, but we’ve not seen the suggested rise in rates that was discussed way back in December 2015.
So now it is just a waiting game. All eyes will be on the Presidential Election, with more and more attention being focused on it.
Why No Rise?
The reason that we’ve not seen a lift in the interest rates is complex, and would take much longer than this blog to fully lay out. In short, however, it is because the economy has failed to meet certain criteria laid out by the Fed themselves. This includes economic markers of manufacturing, employment and inflation.
With borrowing costs low, we have seen a surge to the value of the USD. In most of the major pairings it is more than holding its own, and has even (off the back of Brexit and the recent flash crash) pushed to historic highs against the pound.
But a strong dollar isn’t all it is cracked up to be. With the USD so strong, importing countries will look elsewhere for their commodities, because simply they are more expensive to purchase from the USA. That could then lead to market drops, lower prices, risk to jobs which in turn could affect the potential rate increase.
But Will The December Hike Actually Happen?
The Fed Watch now puts the likelihood of a rate increase at around 72%. That is by no means a guaranteed hike, and will be affected by a certain event scheduled in for early November – the US Presidential Election.
Your reaction as to why the rate increase has been put off until after the election will largely be dependent on your political sway. As we want to remain impartial, we will simply observe two sides of the debate, and not engage it further. Trump believes that the rates have been held off so that Yellen can allow Obama to leave on a career high; meanwhile Clinton’s camp believe the rate has been delayed until it was stable enough to weather the rate increase.
So What Happens Until December?
Between now and the end of the year, the Fed will be keeping their eye on certain economic markers (the non-farm payroll, PMI, inflation etc). Those will have to continue to stay in the region of certain levels in order for the rate increase to happen.
So now it is just a waiting game. All eyes will be on the Presidential Election, with more and more attention being focused on it. Immediate market moves once the election has been called shouldn’t be enough to rock the economic markers needed for the rate increase, but then again if employment continues to slide then the rate increase could be off the cards for the foreseeable.
In these uncertain times, we can expect increased volatility in the markets. And that’s great if you’ve got a guide or a game-plan to get you through the unpredictable times.