And here lies the conundrum. Like the UK, inflationary forces are also beginning to build in the US and, the concern is, the longer it waits to put rates up, the more pressure will be created. But, on the other hand, worries about the fragility of growth globally continues to loom over any sort of action.
Indeed, many commentators who had pencilled in a September rate rise until August’s turmoil now expect the Fed to wait.
Twentyfour Asset Management CEO, Mark Holman says that, while the fundamental case for a rate hike is gradually building on the back of the consumer – as it is in the UK – his expectation that the Fed will stay its hand in September is driven by guidance and market expectations.
“The Fed told us after the last meeting that the decision to raise rates was as always data dependent, but that they wanted to see “some” further improvement in labour markets and confidence that inflation would return to the Fed’s target of 2%. We have certainly seen the former, but the market has taken the recent slowdown in global growth and drop in commodity prices as evidence that hitting the inflation benchmark will be the hurdle that prevents the Fed from acting in September.”
The Fed, he explains is concerned that the market is not prepared yet for the rate hike and should they do so it may result in an adverse market reaction that if escalated could be severe enough to actually harm the recovery, just as it did in the aftermath of the taper tantrum.
“As I type today the expectations of a hike next Thursday are just 30%. The Fed will want a much higher expectation before acting, to the extent that it will be priced in before it comes, so that when it arrives it can be coupled with a very dovish press statement that allows the market to move ahead unscathed.”
