The September meeting of the Federal Reserve is halfway done and at 7pm BST we will have the latest policy announcement from the world’s most important central bank. Markets are still doubtful about the bank’s desire to start a policy normalisation although the vacillation has drawn criticism from other central banks from Korea to Mexico. Emerging markets can deal with higher rates but it is the uncertainty that is hurting their economies and currencies at the moment.
Fears over a ‘taper tantrum’ type reaction – when yields on US debt are driven higher and the USD takes off – are overdone in my opinion. We have seen a gradual increase in the dollar and the interest that the US government pays on its debt in anticipation of an eventual rate rise. Attendees of our webinars and readers of our Federal Reserve whitepaper will know that the previous period of Federal Reserve tightening between 2004 and 2006 actually saw the value of the US dollar fall after an initial run of strength.
I outlined further thoughts on the Federal Reserve to Bloomberg yesterday. The video is available here.
UK jobs driving onwards
If the US was seeing similar jobs industry numbers to the UK, then the decision to hike rates may be a lot clearer. Unemployment fell to 5.5% in July against an expectation of a steady 5.6% while core wages rose at the fastest level for over six years. Herein lies the inflation problem in the UK – global disinflationary pressures are gathering and wage driven inflation is unable to withstand its downward pull.
Sterling rallied on the announcement and continued to drive higher as Carney told the Treasury Select Committee that if growth continues above trend, if wages continue to grow and if inflation accelerates then “the decision comes into much sharper relief and it may be appropriate to begin withdraw stimulus at that point.” That’s a lot of ifs for my money and a lot needs to change before rates can move higher.
Swiss freeze
The Swiss National Bank meeting today is unlikely to see a policy change. As much as the Bank of Japan and the Bank of England don’t want to pre-empt the Federal Reserve, the Swiss National Bank does not want to pre-empt the European Central Bank. Further quantitative easing is expected from the ECB as deflation and unemployment dynamics remain poor and the SNB may feel the need to respond in kind with further rate cuts into negative territory or subjecting more deposits to negative rates than the third to which it currently applies.
Today’s markets are likely to be quiet once again as we wait on the Federal Reserve decision, although UK retail sales could further propel the pound higher of the higher wage/lower inflation environment.