The first
interest rate rise in nearly a decade took place in the US yesterday, after
being really well-signalled in advance. Now the focus of market participants
and commentators must turn to the expected size and frequency of rate rises
each time the Federal Open Market Committee (FOMC) meets through 2016 and
beyond.
Many
commentators expect that there will be a new rate rise after every second
meeting of the committee, making for a total of four rises expected during next
year. Experience would dictate, however, that fundamental economics are not
normally that well-mannered and predictable. And the Fed is on record as
saying, many times, that its decisions on interest rates and stimulus in
general will be “data dependent”. That, of course, is good news for currency
traders, who thrive on the levels of uncertainty that can lead to long-term
volatility in Forex.
The rate
rise yesterday had a tentative feel to it. Economic stimulus, in the form of
the re-investment of the proceeds from maturing bond holdings that are left in
the Fed’s treasury as an overhang from Quantitative Easing, will continue.
Interest rate projections as far out at 2018 have been lowered by the Fed, and
all the talk is of a very gradual and careful path back to normality.
Expectations for GDP rises have also been curtailed slightly.
Inflation takes over from jobs as the
key indicator to watch
But the
biggest caveat of all has to do with inflation. The U.S., and the developed
world as a whole, are a long way away from the 2% across-the-board rate of
inflation that all would like to see. The downward pressure on consumer prices
will continue for as long as energy and other commodities continue to fall, and
yesterday oil took another sizeable hit (see chart above). A barrel of oil on
the NYMEX exchange is now well below the $40 that many saw as a floor not too
long ago.
The Fed has
a dual mandate – it is responsible for controlling inflation as well as for
stimulating and maintaining jobs. Up to now the U.S Non-Farm Payrolls figure
each month has been the statistic that was most closely watched by the markets
as the indicator of what the Fed might do. Are we likely to see the Consumer
Price Index take over this role?
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