To hike or to hold, that is the question that vexes us today and has done so for quite a few months now.
In a few hours’ time we’ll find out the answer to the question that has dominated pretty much every market conversation since the meeting in June
, when the US central bank downgraded its growth forecasts for 2015.
It will also have to contend with a wall of voices pushing it to hike and another wall of voices telling it to hold.
In the “hold” corner we have the IMF, the World Bank,
ex US Treasury Secretary Larry Summers, as well as Janet Yellen’s former economic aide Andrew Levin who has argued that a rate hike would be a “serious policy error”.
In the “hike” corner we have the OECD
who despite lowering their outlook for global growth urged the Fed to raise rates to help remove the uncertainty in the markets.
Former ECB President Trichet has also suggested the Fed should ignore the IMF and World Bank
and raise rates, though I’m not sure taking advice from a man who hiked interest rates twice when in charge of the ECB in the middle of a sovereign debt crisis is the best person to be giving advice on rate rise timings.
The case for raising rates has certainly become less clear cut in recent weeks,
particularly with the US manufacturing sector suffering a sharp slowdown on the back of the decline in commodity prices.
With Chinese growth also faltering and deflationary pressures weighing
on commodity prices, as well as prices more generally markets have certainly become more bi-polar as a result of the recent uncertainty.
While US treasuries are pricing in the prospect of a rate rise
the probability of a move in the Fed Funds rate has been put at 32%.
Even William Dudley head of the New York Fed who had been leaning towards a September move in June has become much less effusive
in recent weeks and this week’s Empire Manufacturing survey is hardly likely to have changed his mind-set in that regard.
It will be much more difficult to gain a consensus against a much murkier outlook
for the global economy, even allowing for the strength of the US economy.
If the Federal Reserve was making decisions on the basis of the US economy you could certainly make a case for a move up in the Fed funds rate
, but given the very weak inflation outlook a rate rise now could be construed as a very strange decision indeed, particularly given how uncertain the global outlook is right now, which suggests any decision later today might well not be unanimous in either direction, for a hike, or unchanged.
The fact is whatever the Fed does today it will be damned from one side or the other,
and that’s before you even start to consider US political considerations like a possible US government shutdown, which could also influence a possible decision.
Given all of this it would be a surprise, and a bit of a punt by the Fed if they were to move on rates today
and for that reason alone a “hold” seems the most likely outcome.
Before tonight’s long awaited decision we also have to matter of the latest UK retail sales data for August,
which have thus far this year been a little slower than last year, but nonetheless apart from a couple of negative months has been generally positive, with gains of 1.3% since the turn of the year.
This has no doubt been helped by continued low unemployment and inflation
as well as the beginnings of a rebound in average earnings as shown by number of 2.9% in the three months to July.
August retail sales are expected to rise 0.1%,
down from the 0.4% seen in July due to lower expectations from retailers as a result of lower footfall in the past month, and a later August bank holiday.
– continues to range trade as it continues to range trade around the 1.1280 level, with the larger support level still at the 100 day MA just above 1.1145, and trend line support from the August lows at 1.1195. A move through 1.1400 retargets the 1.1700 highs seen in August.
– having held above the 1.5330 area the pound has finally managed to test the 1.5520/30 area. This remains the next obstacle to a move towards the 1.5700 area. If we drop back below the 1.5330 area there is a risk of a move back towards 1.5250 and the 1.5170 lows seen earlier this month.
– having failed to overcome the triangle resistance at 0.7375 the euro has slipped back but we still have support at 0.7250. A break through 0.7400 has the potential to target a move to 0.7500. Below 0.7230 suggests a return to 0.7180.
– still sideways trades going on here, with key triangle line resistance at 121.15, and support at 119.15. The US dollar still looks vulnerable to a return to the 116.20 area seen a couple of weeks ago, but for now appears to be range trading between 118.50 and 121.50.
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