The prospect of a US interest rate hike in September has turned from a cast-iron certainty to a suspense-filled cliffhanger — all thanks to turbulence in the share markets this month.
The global economics team at Bank of America Merrill Lynch think they have the answer, and it’s partly down to the timing of the Federal Reserve meeting in second half of September:
The Fed wants to make a slow, gentle exit and hence is unlikely to hike if the markets are fragile. If they met this week, they would remain on hold. However, the Fed meeting is still three weeks away. Our baseline forecast is that the market settles down and the Fed hikes on September 17th.
They argue that although a big stock plunge can have an effect on how wealthy people feel and so affect how much they spend, we’ve not hit levels where that is a problem yet.
Also, the US Fed will more likely base its decision on economic rather than stock market data anyway. Unemployment is the key stat, and that’s strong enough to withstand a rate rise at the moment.
They have put a very strong emphasis on the job market, arguing that strong jobs will not only achieve the Fed’s full employment mandate, but will eventually ensure its 2% inflation goal. And the labour market has delivered, with month after month of 200,000- plus job gains and a steady drop in the unemployment rate.
Finally, it’s not all about equities. The US sovereign bond market is a good indicator of economic stress, measured by the difference in price between short and long term debt. A high spread shows investors think there is a threat to growth prospects in the future.
And that signal is giving the all clear to the Fed to start hiking:
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