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Impact Of Global Uncertainty On U.S. Interest Rate Decision

Published 09/08/2015, 04:21 AM
Updated 04/25/2018, 04:40 AM


It has been four days since we had United States jobs numbers. This has given us some time to take stock and analyse the numbers more closely.

With the Federal Reserve Open Market Committee due to give us their long anticipated interest rate decision in under ten days, how will last Friday’s news influence those who take the crucial monetary policy decisions?

If we break down the numbers that were released last Friday, although the initial number that was announced of 173,000 missed the expected consensus of 215,000, however we need to take into account the large revision of 44,000. Overall with August being historically a poorer performing month with respect to Non-Farm Payroll data, the combined actual and revision does put Friday’s release back in line with expectations.

With the rate of unemployment continuing to fall and hitting 5.1%, a seven year low, combined with the crucial average hourly earnings number increase above expectations to 0.3%, it would appear that the FOMC Chairwoman Janet Yellen has enough good news on the job front to move ahead and finally begin to increase interest rates sooner rather than later.

There are a few issues that could hold back the Federal Reserve boss and fellow committee members from taking that first step in normalizing interest rates. Namely, the situation in China and the recent announcement by the European Central Bank head, Mr. Mario Draghi, that there is now a commitment to do what it takes to rectify the Eurozone’s inflation picture and bring back growth into the Euroarea's flagging economies.

However, the FOMC at some point in the near future will have to discount the problems that are being faced by Europe and the Emerging Markets and focus on what is right for the United States, even if this means increasing interest rates in September.

One sector that has not been mentioned is the US Equity Market. All the major United States indices have experienced dramatic recent falls. If one was to take a look at the broad market index, the S&P 500 has turned negative on both a daily and weekly basis.

However, as the market is now pricing in an interest rate rise between now and December, that the S&P 500 has held up around 1,950 could give Janet Yellen the confidence to push for a rate increase in a couple of weeks’ time.

If, however, the US equities markets drop off a cliff and we see levels below 1,800 prior to the rate decision, the likelihood would be for the FOMC to decide to keep its powder dry and put off a rate hike for the time being.

With all the global uncertainty and financial instability at present, is there such a need to rush into raising interest rates now? Of course, there is a need to normalize interest rate policy, but I do not see much of a difference if this were to happen in September, October or December. In times of such uncertainty, sometimes the cautious rather than the bold decision is the correct one to take.

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