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Did FOMC Jump The Gun With December Interest Rate Hike?

Published 02/05/2016, 04:33 AM
Updated 04/25/2018, 04:40 AM

Yesterday as expected, the Bank of England announced that there will be no change in the Official Bank Rate.

However, what was seen as a major seismic shift in position, the lone hawk on the Monetary Policy Committee, Mr Ian McCafferty reversed his previous bias by voting to keep the overnight rate on hold at 0.50%.

In his speech to the gathered press, the Bank of England Governor, Mr Mark Carney sighted fears over growth expectations for 2016 which have been revised down from 2.5% to 2.2% as a reason why it was not appropriate to consider an interest increase at the present time.

The Bank of England also highlighted potential weakness in the labor markets as it downgraded its forecast for wage inflation for this year from 3.75% to 3%.

Mr Carney said that the decision not to increase interest rates was an easy one to take. The BOE Governor noted that there was still sufficient slack in the domestic economy and that this slack had contributed to the low inflation environment.

Inflation is still stubbornly way off the 2% target that has been set by the Bank of England. This meant that for the 5th time, Mr Carney has had to send a letter of explanation to the British Chancellor of the Exchequer, Mr George Osborne. In his letter, Mr Carney pointed to depressed commodity markets and namely the drop in crude oil values as the major factor.

Mr Carney in his letter said that the next move in British interest rates would be up. However, the markets are not convinced and see the possibility of a cut in interest rates. For sure, with data being so patchy and with global risks creating an overhang over the British economy it is hard to see interest rates being increased any time soon.

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This brings us neatly to the events of this afternoon. Being the first Friday of the month means that across the North Atlantic in the United States it is Jobs Report day. The US labor market and inflation are the 2 key mandates entrusted to the Federal Reserve Open Market Committee.

Last month, the key component of the Jobs Report, the Non-Farm Payroll, posted a massive beat of forecasts with a published number of 262,000. However, for many commentators, this impressive number was an exception. During the recent reporting period, we have seen weak US data with disappointing 4th quarter GDP, manufacturing and export data.

Furthermore, key members of the FOMC are now pulling back from previous hawkish statements. This change of position would seem to bring the FOMC closer to the positions of other major central banks.

The Bank of England’s reconfirmation of prior dovish comments is in line with the Bank of Japan which is committed to quantitative easing. The European Central Bank is expected to introduce further stimulus measures in March.

The FOMC on their part have already moved on rates when they hiked the Fed Funds rate by 25 basis points to 0.50%. However, there is a growing body of opinion that the Federal Reserve was premature in taking this move and may have jumped the gun.

Far from proceeding with the FOMC’s dot plot forecast of 4 rate increases during 2016, some traders are now pricing in the possibility that the December interest rate increase will be taken back.

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The possibility of 4 interest rate increases is being discounted as market expectations forecast that the Federal Reserve will not do anything.

It would appear that the Federal Reserve is trying to make policy decisions whilst it stands on shifting sands. With the economic environment changing so rapidly, it is difficult to see the Federal Reserve moving quickly.

Expect much more wait and see from the decision makers at the FOMC.

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