It will have been three months since the US Federal Reserve raised interest rates for the first time in nine years when the FOMC meets for the second time this year on Wednesday this week.
At the beginning of the year Deputy Fed Chairman Stanley Fischer suggested that the prospect of four US rate rise this year was “pretty much in the ballpark” of expectations for US policymakers.
Events have somewhat taken over proceedings since those words were spoken with concerns about China’s economy, sliding commodity prices and banking sector stability prompting a quarter of significant price swings and volatility.
While Fed officials continue to make optimistic noises about the US economy the tone of the narrative has changed somewhat with Mr Fischer choosing his words much more carefully in recent comments to the media.
US economic data has also deteriorated with the manufacturing sector arguably in recession while the services sector is showing signs of slowing down despite fairly positive employment numbers.
What has also changed is the tone of one of the more notable hawks last year St. Louis Fed chief James Bullard, who does have a vote this year, where he has expressed concern that a further rise in rates would be “unwise” while inflation and wages pressure remain weak.
Other Fed policymakers expressing concern about downside risk include permanent members William Dudley of the New York Fed and Lael Brainard. The latest February average hourly earnings numbers would have been a blow to the hawkish case even without the recent market turmoil, coming in as they did at -0.1%, a sharp drop from the 0.5% gain seen in January.
Even though the market is discounting the prospect of a move on rates this week, investors will be looking for signs that Fed officials are worried enough about the recent global slowdown to have revised down their “dot plot” predictions of the future path of interest rate rises, which at the beginning of the year raised the prospect of at least four rate rises this year.
Some of the more recent economic data has shown some signs of an improvement, and this has seen the prospect of a move on rates in June increase slightly from a few weeks ago. This doesn’t change the fact that the manufacturing sector continues to remain weak, as does wage growth which declined in February.
The market is currently implying a 66% probability of a rate rise at the September meeting and a 51% one in June, however while rate expectations still remain tilted towards at least one rate rise and maybe more this year, it is highly unlikely that the Fed would feel confident enough to move on rates after June, whether they choose to hike then or not.
While the tone of Ms Yellens’ press conference will be important in the context of whether the Fed has any significant concerns about a continued overspill from China and the rest of the world it could well be domestic considerations that come in to play when looking at factors that might determine the Feds rate hike cycle.
While it could be argued that politics shouldn’t influence monetary policy, in the US it most definitely will, and it is hard to escape the possibility that the circus surrounding this year’s US election vote won’t affect confidence in the US economy, and this more than anything could prompt the Federal Reserve to take a back seat lest they be accused of trying to influence the outcome.
US business faced with an unappetising choice of a run off between the polarising figures of Hillary Clinton and Donald Trump in November, could prompt some reassessment of US political risk when it comes to US business and tax policy.
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