The Federal Reserve’s optimistic tone following its latest policy meeting has the market speculating whether it will raise rates in September or wait until after the US election in December.
Fed officials have been fretting since its last interest rate rise in December 2015 about various risks to the economy ranging from long-running uncertainty about China’s outlook to Britain’s vote to leave the European Union. However, after improved US economic data, its latest policy statement said, ‘near-term risks to the economic outlook have been diminished.'
JP Morgan’s head of global fixed income, Bob Michele, said he ‘firmly’ believes that the Federal Reserve is thinking about a rate rise in September.
‘From when they raised rates in December to today everything has improved. Other than the fact they didn’t prepare the markets for a rate rise there’s little data to support not [raising the rate] today,’ he said.
He added that as it is likely the UK will stay in Europe until 2017, there’s even room for two rate rises before the end of 2016.
‘In a way the Fed has the opportunity to raise rates in September and then December. [It could] get the target federal fund rate up to 0.75% to 1% and get out of the way of all of the negotiations that are going to involve Brexit.’
The rate is currently set at 0.25% to 0.50%.
Co-director of global fixed income at Eaton Vance, Eric Stein, agreed that September is not out of the question but he has concerns over the possibility of the US election disrupting the chances.
‘It lays the groundwork for a potential hike this year whether it’s in September or later in December.
‘That’s determined by how the economic conditions both in the US and globally evolve. If there’s a couple of hiccups and with the election it probably gets pushed to December… I wouldn’t say it’s an over 50% probability right now but it’s certainly out there as a potential time for the next rate increase.’
‘September is a very distinct possibility but you really have to see perfection or something close, whereas December is much more fully on the table. It doesn’t have to be perfect for a December rate hike, just a positive trend moving in that direction,’ said Weisman.
‘Income generation from the labor markets, retail sales, the employment cost index, job numbers, and Brexit ramifications have to go well to see a September hike.’