Janet Yellen is signalling that the Federal Open Markets Committee (FOMC) is now close to raising interest rates and probably would have done so last week had it not been for jittery markets and widespread speculation about a global economic slowdown.
I suspect she is anxious to avoid “doing a Trichet” – i.e. raising interest rates just as the global economy is heading into a tailspin, exactly what former ECB president Jean-Claude Trichet did in 2008.
With subdued US wages, oil prices down and the dollar higher, the FOMC can certainly afford to wait a few more months before attempting lift-off.
But ultimately, I think talk of a global recession is misplaced and, if the situation stabilises over the next couple of months, there is every prospect of a Fed hike by the end of the year.
The central bank is hoping to raise interest rates extremely gradually, and thinks that an earlier start will help it achieve that.
Mark Dowding, partner & co-head of investment grade at BlueBay Asset Management, says No.
So in the end, the Fed’s decision was not even a close run thing.
Markets went into the Federal Open Markets Committee thinking the outcome of the meeting was not far from a 50/50 call, yet listening to Yellen’s press conference, it seems that a hike at this meeting was never really on the agenda.
Instead, with inflation forecasts being pushed lower and the Fed citing uncertainty in the global backdrop, an October hike now looks very unlikely.
And although the overwhelming majority of the Committee expects rates to rise before the end of 2015, there must be a growing risk that lift-off won’t now commence until 2016.
In this regard, the Fed outcome should be regarded as a dovish surprise, and this should be supportive of risk assets in our view.
When looking at the global backdrop, it now seems quite feasible that the Bank of Japan and the European Central Bank will announce further policy easing before the Fed begins to tighten.