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Recent big news from the US was that the Fed’s Chair Janet Yellen “sees a possible December rate rise, and a gradual hiking path”. Janet Yellen on Wednesday highlighted a possible December interest rate “lift-off” but said rates would rise only slowly from then on to nurture the U.S. economic recovery.
These are her first public comments since the Fed’s meeting last week and she laid out what now appears to be the base case scenario for higher rates given low unemployment, continued growth and a “faith in a coming return of inflation”. Both bonds and stocks sold off on her remarks. The coming payrolls data on Friday is going to now be pivotal and a strong number will probably be sufficient to push the Fed ahead with a rate rise come December.
A weak number however that disappoints the consensus forecasts will not be sufficient to push the Fed into tightening. I am prepared to wage that if the Fed was faced with a poor or disappointing payrolls number they will push back tightening until next year. This week we have continued to see the US dollar strengthen against the major currencies, so clearly the forex market is pricing in a hike. If and when the Fed does raise rates, I firmly believe they will be totally constrained by a rising US dollar, and therefore the rhetoric may be all about posturing.
In other words, the bark is probably going to be a lot worse than the bite!
Janet Yellen went on to say “what the committee has been expecting is that the economy will continue to grow at a pace that is sufficient to generate further improvements in the labor market and to return inflation to our 2 percent target over the medium term. If the incoming information supports that expectation then our statement indicates that December would be a live possibility.”
“Moving in a timely fashion – if the data and the outlook justify such a move – is a prudent thing to do because we will be able to move in a more gradual and measured pace. It’s been a long time that interest rates have been at zero, but markets and the public should be thinking about the entire path of policy rates over time. And the committee’s expectation is that that will be a very gradual path.”
So that’s Fed Speak for moving the needle on interest rates at probably a very very gradual pace. The problem the Fed has is that a strong US dollar in the current global economy is highly deflationary for the rest of the world and will interrupt global economic growth, not to mention domestic growth for the US.
We have already seen the evidence. So I continue to think that with the US economy out of sync with the rest of the world, any rate rise will be very measured and possibly be accompanied by QE4 next year which would be designed to maintain downward pressure on the US dollar. The Fed therefore is totally limited in terms of what it can put across to the markets and the global economy in terms of tightening, hence the bark is far worse than the bite. The next meeting is set for December 15/16.
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