The US Federal Reserve has been signaling a raise in interest rates as part of an economic normalisation cycle for some time – but with an announcement scheduled for today, there is doubt that the Fed will pull the trigger. The question remains: will they, won’t they?
Nitesh Shah, associate director and research analyst at ETF Securities, does not believe the Fed will raise rates today given the uncertainty surrounding the deceleration of China and Europe, compounded by elevated market volatility.
“A policy reversal will be costly for the Fed’s reputation and we think the central bank will err on the side of caution,” he says.
But Nick Gartside, international chief investment officer for fixed income at JP Morgan Asset Management says there is a good chance that the Fed will raise rates today.
“We believe the three conditions which needed to be in place for a rate rise have all been met,” he says. These are: strong US economic data releases; a response from Chinese policy makers in light of the recent turmoil in emerging markets; and the volatility of US financial assets, such as equities and credit spreads, declining.
Gartside goes on to say that if the Fed does raise interest rates, the central bank will have to implement future increases in a slow, gradual manner to guide markets.
“The Fed will have to be incredibly cautious with how they guide markets going forward which should help to reassure fixed income investors
,“ he adds.
Florian Ielpo, head of macroeconomic research at Unigestion’s cross-asset solutions team in Switzerland, agrees with the consensus that supposes a rate rise today. However, he says market sentiment makes a December hike more likely.
Ielpo strongly disagrees with anyone who says the China-led emerging market slowdown is strong enough to bring the US to the brink of another recession. This is a temporary factor, as is the concern in the market that lower energy prices will reduce capital expenditure by energy companies, such as those in the heavily invested-in shale sector.
As these factors are only temporary factors, the Fed is likely to raise rates by the end of the year rather than today, he says.
Earlier in the summer St. Louis Fed president James Bullard put the chances of a rate hike today at greater than 50%. According to Benjamin Mandel, global strategist, multi-asset solutions at JP Morgan Asset Management, the futures market predicts a roughly 20% probability of a rise. A 25 basis-point rate increase is expected but the market suggests that it will more likely be in December than today.
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