The US Federal Reserve did diddly-squat today (21 September ), but it is still significant, all the same.
Always it seems to be in a few months’ time. Two years ago, the consensus was that 2015 would be the year of significant interest rate hikes by the Fed. Instead, rates went up once, in December of that year. Then we were told that 2016 would be the year of several hikes. Economists predicted at least three increases in US interest rate in 2016, and it was generally agreed that US rates would finish this year above 1%.
Well, breaking news: it’s September. And some more breaking news: so far nothing. Yesterday and today members of the Fed's rate-setting committee, the FOMC, have been sitting and cogitating, and no doubt chewing the fact, but in the end, they chose to keep rates on hold, again. The Fed dropped a strong hint that they may go up later this year, but then strong hints don't count for a lot when they rarely get realised.
Even a few month ago we were told that a rate hike by now was a foregone certainty. Indeed, as recently as a week or so ago, the Fed’s chair, Janet Yellen, and very much its vice chair, Stanley Fisher, were dropping hints about an imminent increase in rates, maybe to 0.75%.
But then the news on the US economy had been middling at best – US jobs are doing well, US consumer confidence is up, but purchasing managers’ indexes tracking manufacturing – which recently pointed to contraction – and non-manufacturing – which recently fell to a six-year low – are not so good. Both industrial production and retail sales contracted in August.
US inflation is rising, but very slowly. The version of inflation that the Fed pays most attention too – personal consumption expenditure (PCE) – has been hovering around 1.6% all year, hardly a level that warrants anything drastic from the Fed.
As for the markets, the FTSE 100 is within 100 points of what was, until 18 months ago, its record – a record that had stood since the end of the last century. The current all-time high is 7,103.98, and at the time of writing the index is 273 points short of that record, that’s one day’s worth of good trading.
But sterling has been falling again – possibly in anticipation of the Fed, possibility as a result of the recent rhetoric over Brexit. At the time of writing, there are around 1.16 euros to the pound, just a cent or two off a Brexit low, the pound is down against the dollar too – 1.295, also a cent or so off the Brexit low.
The biggest hint on whether the markets are expecting a US rate rise comes from the bond markets. In recent weeks, bond yields have risen quite sharply, suggesting that the markets do expect a rate hike soon, but then, in the last few days, they have fallen back, suggesting that the markets have changed their mind. It seems they were right.