Uncertainty remains in the market as we head into the end of the week after the Fed once again put off the decision to raise interest rates in the hope that it becomes more straight forward in the months ahead.
Stubbornly low inflation has long been a thorn in the side of the Fed and its desire to begin the process of interest-rate normalization. The hope has been that a tightening of labour markets will generate inflationary pressures as wages begin to rise but for a number of reasons, the process is taking much longer than hoped. Falling commodity prices and a stronger dollar have only added to the deflationary pressures and now the Fed is concerned about the impact that emerging market turbulence could have on inflation.
While the Fed is not meant to gear its monetary policy towards external markets, they can’t not consider it because what happens in China and other emerging markets does impact the US. An emerging-market crisis would lead to more deflation being exported to the US and with the Fed already uncomfortable with the inflation picture, it’s no surprise that they’re being a little cautious.
That said, the Fed is clearly still intent on raising interest rates this year, most likely in December at this stage. The decision to delay it again will be in the hope that the data over the coming months will show little to no impact on the US from the emerging market turmoil. They will also want to ensure that the events of the last month don’t develop into something more severe. For the markets, it means more months of uncertainty which investors do not like.
Greece has been out of the spotlight for a while now, to the relief of many in the markets, but this weekend it will return briefly as Greeks once again head to the polls. The vote is expected to be very close between Alexis Tsipras’ now more unified and more moderate Syriza party and New Democracy, both of which are polling just under a third of the vote each. New Democracy is believed to have pulled slightly into the lead but as we’ve seen many times in the past, these polls are not entirely reliable. Tsipras has claimed that he would not be interested in a coalition with New Democracy despite the common ground over carrying out the commitments of the bailout program that caused the collapse of the Syriza government. That said, if he has a change of heart it would hardly be surprising. Performing a complete U-turn would not be new ground for him. Although another could completely destroy his credibility.
Today could be a little quieter for the markets in the absence of data and the Fed meeting now behind us. Investors will now look ahead to next week with a number of Fed speeches scheduled. Yesterday’s meeting has created some more confusion in the markets as despite lowering growth and inflation forecasts and highlighting growing emerging market risks, they are still intent on raising rates this year. It’s now down to policy makers to tell us exactly why this is.