The Fed’s course of action is yet to be announced with many analysts suggesting the decision ‘too close to call’
Tony Ward is chief executive of Clayton Euro Risk
Well will they or won’t they? That’s the big question right now. I’m talking about America’s Federal Reserve, who will this week decide whether to introduce its first rate rise since 2006, thus ending an era of near–zero borrowing costs.
The Fed’s course of action is yet to be announced with many analysts suggesting the decision ‘too close to call’. Market speculation puts the chance of a rise at less than 30%, but many economists think it more likely. However, there are concerns that raising rates will give rise to a period of volatility and, given the impact of the slowdown in China which has rocked stock markets, a September rise should be avoided. Allianz’s Mohamed El-Erian said: “Although the Fed still has solid domestic reasons to raise rates, it cannot – and should not – ignore the worsening international context.”
Others, too, have voiced their concerns. The World Bank last week warned that the Fed risked triggering ‘panic and turmoil’ if it raised rates, arguing that emerging economies would be hit hardest. Kausik Basu, the World Bank’s chief economist, said: ‘‘The world economy is looking so troubled that if the US goes in for a very quick move in the middle of this I feel it is going to affect countries quite badly.”
On the flip side, the hawks suggest that recent US data supports a rise, with the American labour market enjoying full employment. Others wish America would act to end uncertainty. “If they don’t go now it gets harder and harder for them to go,” said Colin Graham of BNP Paribas Investment Partners.
Whatever the decision, analysts believe the risks of a policy mistake are high. Quite right.
For what it’s worth, I don’t think the Fed will raise rates this week. Recent worsening economic data from China will add ammunition to the argument to stay their hand. However, as I said in an earlier blog, notwithstanding a further slump in the global economy, I believe there will be a rate hike later this year. And then of course the attention will turn to the UK.
But that’s an entirely different story…
