The Most Dramatic Rate Decision in Years
By the end of the trading day this Thursday, after the Fed’s dramatic rate decision, one of two things will happen. In one scenario, we could be combing through the rubble of the world’s financial markets as a result of the aftershock. In contrast to the shell-shocked equities and commodities traders, Dollar bulls will be smiling and gloating all the way to the bank. In another scenario, we’ll be listening to the giant sigh of relief and giddy glee from equities traders around the world as they send stocks surging. In the days leading up to Thursday, however, traders everywhere will be on the edge of their seat in anticipation.
Collectively, everyone is awaiting one of the biggest, most important decisions the Federal Reserve has made in nearly nine years. The issue, of course, will the Fed opt for an interest rate hike given the growing concerns over global growth. And specifically, as that growth relates to China, which is the world’s second largest economy only after the US. The Fed’s latest meeting minutes suggest that the Fed’s FOMC members are still largely on the fence. However, at the same time, they appear to be “getting their ducks in a row,” as the saying goes. That essentially means they’re getting everything ready, just in case.
As of yet, there is no consensus on what the Fed will ultimately decide, and analysts and experts remain divided in their expectations. Only a few weeks ago there had been a nearly even split among experts, now momentum seems to be building for the Fed’s doves. And, of course, all of this drama will be resting on the dainty shoulders of the Fed’s Chair, Janet Yellen. Many believe that Yellen, who has repeatedly assured markets of a 2015 rate hike, has a bit of a credibility issue. More and more experts are coming on board with the opinion the Fed should stay the current course. However, there are legitimate arguments to be made on both sides. The question is, with Janet Yellen taking point, is the Fed, finally, after many long, long years, ready to venture into the unknown?
Those in favor argue that the after nearly nine years of loose monetary policy, the US economy is recovering and doing well with improved numbers in retail sales and new home sales. Also, the labor market has had consistent improvement with the lowest unemployment rate in more than eight years. The president of the Richmond branch of the Federal Reserve, Jeffrey Lacker, has recently argued that both inflation and the labor market are at a point that justifies an interest rate hike. More telling, Fed Vice Chairman Stanley Fischer recently said that he felt the Fed shouldn’t wait for inflation to hit its target before it would begin tightening. Bill Gross, the former PIMCO CEO, said that the Fed has criticized the Fed for moving too slowly.
Those against a rate hike, which include a fair number of the FOMC’s voting members, seem to be waiting for further validation before committing to a rate hike. Those that favor postponement of a rate hike have argued that the economic situation in China could be far worse than Beijing is reporting. That is especially given the government’s propensity to downplay negative aspects. Further, the Fed would seem too indifferent to the markets’ concerns (which are clearly evidenced by the recent rout in global equities). Last but not least, inflation still remains south of the Fed’s target. Warren Buffett, while not specifically offering an opinion on the rate hike, does have concerns, however. Buffett noted that if rates were increased in the US, given the disparity of those say in Europe, there could be consequences for trade further down the line.
Dollar Bulls Gunning for the Driver’s Seat
The Dollar bulls have taken a back seat for some time now given the high liquidity environment in the US. They’re more than ready for the Fed to do some tightening and are anxious to push the Dollar higher. The Dollar bulls will gain control if the Fed does indicate that a rate hike remains on the table for 2015. In the absence of that indication, the Dollar Bulls gloomy disposition is likely to endure.
Wall Street Holding its Breath
If the Fed stands pat and holds interest rates at bay you can expect the bulls of Wall Street to stomp and snort with glee. A postponement of a rate hike could help the S&P500 surge higher. However, if the Fed does surprise and keeps up the rhetoric of a 2015 rate hike, that would weigh on Wall Street. Combine that with global equities rout amid the turmoil in China and it becomes clear that the timing couldn’t be worse for Wall Street bulls.
Gold Bugs Fear a Meltdown
If the Fed decides that a rate hike is appropriate for 2015, then Gold bugs may soon be hearing the furnaces heat up as the meltdown begins. A rate hike could push Gold to a low level not seen in many years. As a commodity that is Dollar-denominated, an interest rate hike would make it more expensive to purchase in other currencies. Though demand from Asian buyers has helped to limit losses, analysts point out that global demand has been softer than normal.
Down to Business
Without a doubt this will be a huge week for a whole host of financial markets across the world and it all comes down to the Federal Reserve’s decision. First and foremost, a Fed interest rate hike could ignite a hefty and broad Wall Street sell-off, with a rout that could race quickly around the globe’s equity markets. At the same time, Gold would begin to meltdown quickly as it would become more costly to own. The US Dollar would be pushed higher across the board, and with strong momentum. However, if the Fed decides to postpone a rate hike, the one very noticeable and very swift reaction will be a huge sigh of relief from the world’s equity markets, beginning right on Wall Street.
On the plate
Bank of Japan Rate Decision(Monday) – If the BoJ signals there is a highly likelihood of more stimulus the Yen could face selling mainly against the Dollar and Sterling.
UK CPI(Tuesday) – If the UK’s CPI crawls higher it could signal the BoE will follow the Fed and raise rates a few months after.
US Retail Sales (Tuesday) – If US Retail sales will beat estimates it could raise bets on a rate hike this Thursday.
US CPI (Wednesday) – If US Core CPI rises to 2% and beyond the dollar could rally amid speculations of a rate hike the day after.
FOMC Rate Decision(Thursday)- The most important event of the quarter perhaps of the year. If the Fed does raise interest rates it will send ripples across the board from FX to commodities to equities.
Chart of the week – EURUSD
Real Time Economic Calendar provided by Investing.com.