Speculation over whether the US will raise interest rates for the first time since June 2006 has reached fever pitch in recent days, and will only intensify further as we head towards the conclusion of the FOMC’s September policy meeting later in the week.
Markets are of the view that the FOMC will hold off on rates, with fed funds rate futures pricing the probability of a 25bps increase at less than 30%.
While markets are firm in the belief that interest rates will be left on hold, economists are evenly split on whether or not the Fed will go.
Some believe current conditions justify a modest increase in interest rates, noting that if now is not a good time to increase interest rates, when will be. Others take a more cautious view, noting that recent financial market volatility, along with continued subdued inflationary pressures, should see rates left on hold at the conclusion of the FOMC’s September 16-17 meeting.
It’s a line-ball call, and one that will almost certainly cause extreme short term market volatility whatever way the FOMC vote. It’s a coin toss, no matter what you view on whether or not they’ll go.
Like the broader economic community, Australia’s big four banks are evenly split on whether or not the Fed will raise rates later in the week. Two believe the Fed will go, two believe they won’t.
Here’s Westpac, one of the banks calling for an increase in rates this week.
“The question that must be asked from all of this is, if the US economy is not currently placed to withstand a policy rate increase, then when will it ever be? Market volatility can occur at any time, and it is not necessarily the case that come December (or indeed March 2016) that the real economic momentum in the US economy will be as strong or stronger than it is now. Despite recent market volatility, we maintain our September call”.
And joining them in calling for higher rates is ANZ.
“Our central case remains for the Fed to start the policy normalisation process this week. Admittedly, recent financial market ructions have raised concerns about global growth prospects. Most notably there is a high degree of uncertainty about the outlook for emerging market and Chinese growth. These doubts will weigh on FOMC policymakers’ monetary policy deliberations.
In sum, there is no question the US domestic economy is solid enough to cope with a modest tweak in interest rates from zero”.
CBA take a more cautious approach, suggesting the FOMC will wait until its December meeting before lifting rates.
“We expect the FOMC to wait until the December meeting. The US economy retains good momentum though there are downside risks from the softer global economy and the strong USD. We think those downside risks will give the FOMC reason to hold off from tightening in September. But the FOMC cannot wait a lot longer. The tightening US labour market will filter through to stronger wage gains and greater inflation pressures in 2016. Analysts are split about 50:50 and the market favours no change. There is certainly potential for more market volatility depending on what the Fed says and does”.
Like CBA, the NAB are also believe the FOMC will look to its December meeting to begin its tightening cycle.
“We have been reasonably confident the Fed’s labour market conditionality had been met but had been puzzled by why the Fed would set inflation conditionality as it did. The idea the Committee could be ‘reasonably confident’ that inflation would return to target over the medium-term seemed futile given current downward pressures. The take-away from Jackson Hole however, that the Fed was ready to go absent the market turbulence, suggests meeting the Committee’s inflation conditionality merely meant having confidence in its medium term (higher) forecasts rather than actually observing a turn higher in prices.
So we enter this key event thinking a December hike is more likely than September, but still can’t rule out a move this week”.
So there we have it: two for and two against, with none of the big four overly confident that their call will end up being correct. It’s a coin toss, and will ensure a period of short term extreme market volatility given the heightened levels of uncertainty.
It all kicks off at 4am AEST Friday morning. Then, and only then, will the uncertainty desist.
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