The Federal Reserve has continued to take a tough rhetorical stance towards its key interest rate, having warned investors consistently over the last year that they would be hiking. But in actuality the Fed hasn’t mustered more than one shot. They did raise the interest rate to .50% late last year, but have not been able to do it again.
So is the Fed wrong? Have they now created a scenario that has made investors not pay attention to their constant threats about raising interest rates? Is there an actual silver lining within the U.S. economy that will allow the Fed to back their rhetoric with action, or are they misguiding the public in order to try to bolster long-term sentiment?
The Advance GDP numbers last week were worse than disappointing. Demand for crude oil continues to indicate that the global economy is suffering. Even with an interest rate cut from the Bank of England today, investors are not going to regain their confidence in mass. Monetary policy from central banks has been called into question worldwide as critics grow in numbers about the stagnation that has now enveloped Europe, Asia and North America.
The Single Currency could be a currency to watch the next few weeks and into September. If U.S. data continues to be disappointing, and the Bank of England interest rate cut puts investors on a better footing regarding their outlook for the direction of the U.K. post Brexit, the EUR, which has been trading under the influence of the GBP and USD for the past year and a half, might be able to escape some of the shadows that have been hampering its values.
Because of its constant talk about raising its interest rates, the Federal Reserve has actually made the USD too strong for the manufacturing industry in the States, making their products harder to export as they have become more expensive against a devalued GBP and EUR. In other words, the Fed has hurt U.S. growth.
The Non-Farm Employment Change numbers will come from the U.S. tomorrow and this will be certain to get plenty of attention, but the story has already been written via other economic data which has disappointed via growth and personal income. Unless there is an incredible amount of jobs added per tomorrow’s jobs numbers, investors are likely to remain cautious based on their belief that the Fed is not being straight forward about its economic outlook.
If the Federal Reserve were to come out and say that it is considering raising its interest rate at the end of 2016, because they do not want to be equated with the near zero interest rate crowd, nor the negative interest rate theories this would be a welcomed statement.
Unfortunately, if the other major central banks continue to practice extremely low interest rates, the Fed will be put into a position that would harm the U.S. economy if it actually did hike its rate. Not only the Federal Reserve needs to get their act together, but the BoJ, ECB and BoE all need to hit the reset button collectively, otherwise investors will continue to be confronted with stagnation globally and equity markets that resemble potentially over valued assets.