As we have recently seen, trouble in the markets in one part of the world can drag down markets and even economies in another. The Fed has to wrestle with the question of whether basing its decision on US economic data only is actually in the interest of the country and its people.
There is a fairly clear consensus that the domestic data taken in isolation demands a rate increase. With growth on track for a punchy 3.7% and unemployment at just 5.1% the economy appears decidedly robust. With rate rises having a significant lag between when they are implemented and when they have a real world effect, if anything a rise is overdue on these metrics. The only thing that has kept the brakes on inflation this long is the soft oil price.
However, if its move into rate raising causes further collapse in emerging markets, or even chokes off the European recovery, that would certainly weigh on America’s markets and economy to some extent.
According to James Klempster, portfolio manager at Momentum Global Investment, the market is pricing a 28% chance of a rate rise this week, however a Bloomberg survey of economists paints a different picture with 50% expecting a 25bps hike.
“The recent market volatility has undoubtedly made the Fed’s decision more challenging because while the past couple of months have been volatile from an asset class perspective, the US economy seems to be on a reasonable footing,” Klempster said. “Interest rates are unusually low, especially given how far from the recessionary trough the US now finds itself, but the life support provided by central banks to the global economy in the prolonged aftermath of the global financial crisis is still largely in place,”
