What to expect from the November Fed
Janet Yellen and the US Fed have been like a broken record in 2016: ‘we are data-dependent’ when it comes to interest rates. So, after a run of pretty good economic news and data from the US in 2016, why has the Fed not yet put up rates? Will we see a final farewell to the era of ‘data-dependency’?
So what does ‘data-dependency’ mean? It means that, if you see job growth with a positive NFP, that’s good news. If you see a better-than-expected or in-line GDP, that’s good news. The list goes on. Essentially, the more positive US data we have, the more likely the Fed is to raise rates. So why haven’t they?
Firstly, we have to remember that the Fed initially talked about a possible four rate hikes in 2016. Analysts were right to be sceptical about this and we soon saw after Q1 that this was unlikely. The problem for the Fed was that, although the US data was fairly consistent, the rest of the world continued to spring surprises.
China, as a lot of experts had feared, seems to be overstating its own growth figures. There are also major concerns about its debt bubble. We also had Brexit and its ramifications for the world’s fifth-largest economy, and for the much larger European Union. Added to which, we have a US presidential race with two candidates whom, frankly, no one particularly likes.
With all this ‘noise’ and distraction the Fed had the perfect opportunity to say that, despite the data-dependent strategy, with such important external factors affecting global growth it was better to adopt a wait-and-see approach on rates.
So where does this leave us?
For me personally Yellen has been backed into a corner. If she does not raise rates in December, as 80% of analysts are predicting, she will finally lose all credibility. Extraordinary measures like QE and ultra-low rates have simply not encouraged the rapid sustainable growth the US wanted. It is time to bite the bullet. The world – and certainly the US, the world’s biggest economy – cannot simply live forever on borrowed time and money.
I foresee a rate hike before the end of 2016, two hikes in 2017 and, by 2020, rates closer to 2.5%. We may then have returned to some semblance of normality.
Chief Market Strategist, InterTrader
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