t’s been over nine years since the US Federal Reserve last raised interest rates, so history could well be made this week if the FOMC rate setting committee of the US central bank decide to raise rates by 0.25% when they meet for the final time this year.
Over the past few weeks there have been clear signals that US officials have been preparing the market for a rate rise, so much so that the Fed Funds Implied Probability indicator suggests that there is an 78% possibility that we will get a move this week.
It has also been suggested that the recent surprise decision by the European Central Bank to be more cautious about pushing extra stimulus into the financial system may have been rooted in concerns that too aggressive a move might well have caused the Fed to delay a move on rates. Policymakers will also have to weigh up any possible long term effects the recent decision by Chinese authorities to launch a new Yuan trade weighted basket could have on further deflationary forces in the global economy.
Putting that suggestion to one side for the moment there is one factor that might give the Fed pause and could in fact cause a big split amongst those on the rate setting committee. In fact Fed Chair Janet Yellen hinted at it a couple of weeks ago when she suggested she wouldn’t necessarily need a unanimous decision with respect to tomorrow’s decision.
This split could well come about as a result of the continued turmoil in commodity markets as crude oil prices as well as metals prices flirt with multi year lows.
Certain policymakers on the Fed’s rate setting committee have been vocal in recent months about their concerns that international factors could have a chilling effect on the US economy, a not unreasonable concern given that the US manufacturing sector has slipped into recession, according to the most recent ISM data.
Hawks on the committee have pointed to the fact that the US economy is humming along nicely, driven largely by some decent growth in its services sector, and that the US economy should be more than able to absorb a doubling of the baseline Fed Funds rate from 0%-0.25% to 0.25%/0.5%.
Time will tell but two engines of growth are always better than one, and with manufacturing stalling the question the Fed needs to ask is whether they really want to run the risk of stalling out the remaining one at a time when prices are still falling and the services sector might be on the verge of easing off its best levels.
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