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So what does the Fed do now?

01 September 2015
Last time I wrote about the Fed and upcoming decisions on monetary policy, domestic economic and financial conditions were of paramount importance.  All we were waiting on was “some further improvement in the labour market” before the Federal Open Market Committee (FOMC) pulled the trigger on the most anticipated US rate hike ever.  Life was simple then.

The US economy has delivered and more, making September a done deal – that is, if all that mattered was the domestic economy.  July labour market data was consistent with further improvement, second quarter GDP has seen a significant and broad-based upward revision and third quarter partial data appears, at least so far, consistent with continued above trend growth.

But we’ve also seen significant market volatility and heightened concerns of a hard landing in China.  This complicates things a tad.

Market volatility by itself will not delay the Fed.  Janet Yellen has previously warned that as we get closer to the first rate hike we could see “heightened financial volatility”.  Indeed that is simply an observation of history – previous rate hike events have seen similar degrees of equity market weakness.  If we wait till there’s no volatility, the Fed will never hike.

But a delay is likely if this volatility is indicative of factors that will have a direct impact on US growth and/or inflation.  It is the extent to which that volatility reflects fears of a hard landing China (and therefore weaker global growth) that may see the Fed delay lift-off.

Recent Fed speeches have added colour.  Dudley was generally perceived as being dovish, although the most used quote from his speech was taken out of context.  Fischer’s speech from Jackson Hole was more non-committal and leaves the door open to a rate hike at any time, including September.  This reinforces the fact the FOMC has not yet decided when to hike and every meeting is ‘live’.

Lift-off has to happen at some point.  Market volatility was inevitable as we got closer and is not a reason to delay.  But to the extent to which the FOMC considers the volatility to be China-slowdown related, they may delay until clearer signs of stability in China emerge.  And of course watch out for the August labour market report at the end of this week.

This blog post has been prepared to provide general information and does not constitute 'financial advice' for the purposes of the Financial Advisors Act 2008 (Act). An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice. While every care has been taken in the preparation of this document, AMP Capital Investors (New Zealand) Limited and the AMP Group (together, 'AMP') make no guarantee that the information supplied is accurate, complete or timely and do not make any warranties or representations in respect of results gained from its use. The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP. These views are subject to change depending on market conditions and other factors.

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