Anna Stupnytska, global economist at Fidelity Worldwide Investment holds a different view, however. Because there are no current signs of inflationary pressures and because the Fed itself cannot be reasonably confident that inflation will start picking up, and converging to its target, over the next, say, six months or so, she said, it couldn’t have increased rates.
Especially in a world where financial conditions have already been tightened by the strength of the dollar. Indeed, she added, while it is not her base case scenario, there is a small possibility that the next move in rates could be down as opposed to up.
Either way, as Anthony Rayner, co-manager of Miton’s multi-asset fund range, points out, currently all roads lead to the US Federal Reserve and the lack of policy visibility that has come as a result of its recent decisions has increased financial market stress.
“The Fed has stated policy will be ‘data dependent’ but this hasn’t helped visibility as markets aren’t sure as to the degree to which they are looking at domestic or overseas economic data, or the broader health of the financial system.
The problem as Rayner characterises it is that “ the backdrop of slowing global growth and heightened financial market stress can only be good for markets if the ‘bad news is good news’ thesis and Fed credibility hold.”
And therein lies the problem. As Rayner says, “Sustained elevated financial distress is unlikely to allow markets to move ahead”. But, likewise The Fed is only likely to remain credible as long as their monetary policy hold looks like a data-dependent choice and not dithering indecision. And, the longer they hold on, the thinner that line becomes to walk.
