Thursday 17th September brings another FOMC statement from the US, the first meeting since the financial crisis in 2006 in which the chance of a rate rise is a true possibility. Janet Yellens language at the recent FOMC meetings has gradually become more hawkish, evolving from ‘Considerable time’ to ‘Patience’ to ‘Not impatient’ and at the most recent meeting has stated that the US economy is ‘Nearly balanced’ suggesting an increased likelihood of a hike. Futures have the probability of a rate increase at 36% up from 26% suggesting that recent economic releases are leading the US into a period requiring higher rates.
The price of oil is potentially keeping inflation artificially low and a strong dollar is compounding this effect due to The US’s import driven economy. The US employment rate is low and has continued to stay low for a sustained period of time and as a consequence inflation will begin to rise at some point. Sustained low inflation would allow the US to be more patient with there interest rate decision and problems within the emerging markets would compliment this more dovish approach. If ‘lift off’ is activated due to a ‘balanced’ economy a rate increase of 0.125 per cent is expected with a cautious Fed raising interest rates steadily to a more ‘normal’ level in the region of 2-3 per cent by 2017.
Written by Henry Green – LTG Fundamental Analyst