The stock market rally, kicked off last week from ECB and Bank of China sugar hits, has stalled in the past few days as markets wonder about the future path of US interest rates and the fret about the Fed’s decision on monetary policy at 2pm New York time (5am AEDT Sydney) tonight.
While almost no one is expecting any move, the statement from the Fed is seen as more important as a chance to clarify intentions on the future path of interest rates. The market is currently confused about the Fed’s intentions, with many agreeing with noted US economist John Taylor (creator of the Taylor Rule for monetary policy setting) contention that no one knows what they are doing.
But, in a note released today the ANZ’s research team published its FX Monthly Outlook, which contains a chart showing that even without a Fed rate hike financial conditions in the US have tightened significantly in the past 18 months.
“Being confident about the Fed’s policy stance is difficult,” Richard Yetsenga, ANZ’s global head of financial markets research, says.
Yetsenga notes that while the Fed is operating in an unusual policy environment, the ANZ’s financial conditions index (FCI) “over the past 18 months has shown the largest tightening since the financial crisis, and a tightening which is in fact comparable with some past rate hike cycles“.
That tightening in conditions will already be slowing the US recovery as the data flow in the US recently is starting to show.
So, with other central banks easing, or promising more easing, market instability still close to the surface, and the US dollar rallying again (another tightening in financial conditions) it’s increasingly looking like the Fed would be mad to lift interest rates anytime soon.
This looks like a very different take on the Fed to John Taylor, but based on the ANZ’s analysis financial conditions in the US have already tightened
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