Geoff Candy 2017-12-01 07:07:37
. US Federal Open Market Committee votes once more to hold interest rate at its September meeting
. US election will defer decision on hike until December despite growing pressure from FOMC members
What’s the story? The US Federal Open Market Committee (FOMC) has voted again to hold rates at 0.25% to 0.5% at its September meeting.
The decision was anticipated but it puts the spotlight on the US election on 8 November.
The FOMC meets at the start of November but it is unlikely it would act within days of the vote, meaning December is now the earliest a raise could come.
PA viewpoint Given that the market was pricing in a 20% chance the Fed would hike rates, last month’s decision was unsurprising. But the number of its members calling for a hike grew and this has boosted expectations that the Fed, which is intent on at least one further hike this year, will raise rates in December.
The hardening of support on the FOCM for a further rate hike shows a clear shift to policy normalisation, and the market is starting to take notice.
But there are still unknowns. Not only does the US take to the polls in November but Italy is also set for a referendum on constitutional reform before year end, which could have a big impact on the global economy.
And, as proved by the UK’s decision to leave the EU, things can change rapidly.
What the industry thinks Dominic Barnes, portfolio manager at Investec, said: “The FOMC’s decision was expected, given the slow rate of improvement in economic data. But there was some dissent, with three members calling for a rise.
“The overall tone of language firmed, acknowledging that growth had picked up, but there was still room for improvement in the labour market. We now expect only one hike in 2016, at the December meeting.”
According to Thanos Bardas, head of interest rates and sovereigns at Neuberger Berman, the Fed risked “losing investors’ attention” through its inaction.
He said: “Key global risks that helped delay Fed action have receded, including Chinese growth prospects, currency volatility and EM weakness.
“Though Brexit fears have eased, as UK data continues to surprise on the upside, there is more concern about the danger of stimulus-related excess, whether in commercial real estate, corporate balance sheets or share buybacks.”
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