Markets are
pricing in an increase this week — but there are good reasons the Fed
would be wiser to hold off, writes Adriaan Pask
Janet Yellen. Picture: REUTERS
Although markets have started pricing in a December rate
hike by the US Federal Reserve, PSG Wealth believes there is a strong
argument to be made that they should not.
Markets took their cue from Fed chair Janet Yellen’s testimony before Congress on November 17,
where she hinted at a hike.
She said the election of Donald Trump to become US president did nothing to change the Fed’s plans for a rate increase "relatively soon".
The Fed’s own predictions are that 10 out of the 17 federal open market committee (FOMC) members, who will determine whether or not to change interest rates, believe a rate hike of 25 basis points should take place in 2016.
Four members believe it should be a larger increase, while only three of the members believe the rate will stay where it is.
Against this background, and seeing as the Fed has not raised rates this year, many believe December is the appropriate time.
Data on the strength of the US economy, the strength of the labour force and inflation are some of the important statistics that inform the FOMC’s decision.
Although US inflation is moving closer to the targeted 2%, and although unemployment numbers have improved dramatically, population growth and labour productivity numbers make a rate hike in December less likely than commonly believed.
US expansionary monetary policy is supportive of economic growth, at present. If this support is removed by the next administration, one has to wonder what policy action or potential drivers of economic growth could take over the baton from monetary policy.
Markets took their cue from Fed chair Janet Yellen’s testimony before Congress on November 17,
where she hinted at a hike.
She said the election of Donald Trump to become US president did nothing to change the Fed’s plans for a rate increase "relatively soon".
The Fed’s own predictions are that 10 out of the 17 federal open market committee (FOMC) members, who will determine whether or not to change interest rates, believe a rate hike of 25 basis points should take place in 2016.
Four members believe it should be a larger increase, while only three of the members believe the rate will stay where it is.
Against this background, and seeing as the Fed has not raised rates this year, many believe December is the appropriate time.
Data on the strength of the US economy, the strength of the labour force and inflation are some of the important statistics that inform the FOMC’s decision.
Although US inflation is moving closer to the targeted 2%, and although unemployment numbers have improved dramatically, population growth and labour productivity numbers make a rate hike in December less likely than commonly believed.
US expansionary monetary policy is supportive of economic growth, at present. If this support is removed by the next administration, one has to wonder what policy action or potential drivers of economic growth could take over the baton from monetary policy.
There have been comments that the envisaged replacement
driver will be fiscal policy, but the FOMC must wonder whether that will
be sufficient to ensure sustainable economic growth.
In addition,
there have been remarks that future policy will be aimed at a more
closed approach to international trade, which could compromise the
contribution of net trade to GDP. Also, government spending has been a
negative contributor to GDP growth in recent times.
Even though
there might be those who expect the Fed to hike interest rates now, the
Fed will need to know who will step in to support monetary policy if
they make this decision now.
Trump has indicated that fiscal
policy could be this support, but no clear indication has been given
about what exactly this fiscal support will be. The US cannot really
rely on government spending, because this has not truly contributed to
GDP growth.
A clearer outlook on fiscal policy combined with
improved corporate earnings should support economic growth over the
medium term. The FOMC could opt to wait for clarity regarding these
numbers, and also rather wait for inflation numbers to approach the 2%
target, to ensure a firmer footing before starting a further rate hike
cycle.
In short, the Fed should not hike US rates just yet.
Although there has been a marked improvement in key areas of the US
economy, the Fed could wait for additional data or reform that will
support the sustainability of the improving trend, once monetary policy
support has been reduced.
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