A spate of dismal data on the USA and global economies has ignited speculation the central bank will wait until 2016 to begin its “lift-off” from near-zero rates. After the September meeting, Yellen noted that 13 of 17 Fed officials expected the first rate hike to occur this year.
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Fresh economic data has been mixed, at best, since officials met last month, when they left their benchmark federal funds rate near zero. Although the Fed did as expected the statement language changed significantly indicating that a rate increase in December was also a certainty. Bank margins have fallen to 3.02 percent as of the first quarter of 2015, the lowest average since 1984, the Federal Deposit Insurance Corporation said. Bond yields rose, particularly the two-year, which is most sensitive to Fed policy.
The Fed holding off yet again is good news for investors (Canadians included) because it suggests that easy money is going to be around for longer, helping to drive up asset prices in the short term.
There was no overt indication that the Fed would change its rate policy in December, but the committee did add a reference to the “next meeting”, which was seen as hawkish by a few rate strategists.
Fitch concluded that it “does not expect significant ratings movements due to rate risks”. That said, given the sensitivity to the data that we’re likely to see over the next six weeks, I don’t expect that to get in the way of the markets overreacting to a single preliminary release.
The Fed hawks showed their talons but the market remains unconvinced.
The Australian and New Zealand dollars extended losses into a third day amid bets their central banks are mulling further rate cuts.
In the FOMC’s statement on Wednesday – no news conference from Fed Chair Janet Yellen this time around – it made no bones about that intention. USA job growth has flagged. We would look for a potential breakout trade after the 1 PM end of the FOMC meeting; either a rally above Tuesday’s high of 1.1086 or a break below 1.1037 (Tuesday low) and 1.1004 (Friday low). That hearing is on regulation, though the questioning could extend to monetary policy. Deflation is Kryptonite to the Fed and their “targeted” inflation scam of 2%. Under these global circumstances, a Fed rate hike would further push the dollar toward parity with the euro, hurt U.S. exports and economic growth – – not something the Fed would like to face less than a year ahead of presidential elections!
The FOMC now has 2 months of data to parse, including Thursday’s Q-3 GDP estimate, and employment reports for October and November, before deciding if the economy is strong enough to withstand a rate hike. GBP fell the least among major currencies with the Bank of England still widely expected to raise interest rates in early 2016.
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The value of the dollars was, therefore, transferred to developing nation stocks and commodities and the process spurred developing nation economic growth which, in a feedback cycle, generated generous yield for foreign investors. The Wall Street casino and all its financial engineering marvels benefitting the “one-percenters” (stock buybacks, increasing dividends, mergers, acquisitions, leveraged buy-outs, etc.) will crumble in a New York minute once the gravy train of the Federal Reserve interest rate put is removed from the board game. It is fair to argue whether not raising rates in mid-September was a missed opportunity, or whether the Fed’s caution was confirmed by the slippage in economic conditions since then.
