Global financial markets are bracing themselves for the Federal Reserve to hike rates, after Friday’s positive jobs figures left the way clear for a December rate rise.
At last month’s meeting the Federal Reserve gave their strongest hints yet that a rate hike was on the cards. Despite the uncertainty prompted by the resignation of Italian Prime Minister Matteo Renzi, most analysts now believe that the Fed will use their December meeting to make their second policy rate increase in 10 years
The markets are already pricing this in but according to deVere Group international investment strategist Tom Elliott, it may be premature.
“Financial markets are pricing in as a certainty a 25bp rate hike at the forthcoming FOMC meeting. This will take the key Fed funds rate up to a range of 50bp-75bps. Supporting the market’s view is the strength of the U.S. economy, with some strong data emerging last week that suggests inflation pressures are building.
“This data includes that third quarter GDP growth has been revised upwards from 2.9 per cent annualised, to 3.2 per cent; a key housing statistic (the Carelogic Cas Schiller National Price Index) passed its previous July 2006 high; November payroll data was strong at 178,000 new jobs created, while the unemployment rate fell to 4.6 per cent; and CPI inflation is at 1.6 per cent, which is in spitting distance of the Fed’s 2 per cent target.”
Mr Elliott continues: “However, the markets’ pricing in of a rate rise at this stage could be premature. Indeed, we have seen similar market certainty of a rate hike several times before this year, notably in May.
“The prime cause of uncertainty this time is not fear of a rash of weak economic data, but how the dollar behaves over the coming week.
“If it continues to strengthen, in anticipation of higher Fed rates, the Fed may actually hold off. A strong dollar exerts its own form of monetary tightening because exports weaken, import prices fall and so put a downward pressure on domestic competitor prices.
“The Fed may prefer to delay a rate hike, than impose a double-dose of higher borrowing costs on corporate America as well as a still- stronger dollar.”
The next Federal Reserve meeting takes place on the 13th – 14th December.
