As predicted, the Federal Reserve kept short-term interest rates unchanged at near zero yesterday but signalled that a rate hike before the turn of the year remains a possibility.
As was the case in September, the central bank’s accompanying statement did not explicitly mention concerns over the Chinese economy as a reason not to raise rates for the first time in a decade. Last month they cited turbulent financial markets and uncertain economic developments overseas as reasons for expected further downward pressure on inflation in the near term.
As we all know the Fed has an inflation target of 2% as a signal that the US economy has recovered sufficiently to be able to raise rates.
US GDP figures released this afternoon were less than encouraging though, showing a moderate gain of 1.5%, below expectations, proving the economy is continuing to grow but at a slower pace that was hoped.
Following the statement last night, the USD caught a bid against most other currencies and we saw immediate pressure on US equities. This abated overnight during the Asia trading session; the U.S. currency erased much of its overnight gains as investors bought back the yen, given news of unexpectedly strong Japanese output in September.
The US Jobless Claims figure was a little more encouraging, coming in at 260k; expectations were of 265k claims, showing a small increase of only 1k from the previous week.
There is, of course, every chance economic data will get a lot better between now and the Fed’s next meeting in December and the central bank’s wish for raising rates this year will come true. Considering the disappointing quarterly results of many multinationals and other companies with overseas exposure have reported in recent weeks, that rebound may not come. In that case, the Fed likely will have to wait.
Odds the Fed will move on rates at their last meeting of the year has risen to 48%, up from around 32% a week ago.
The strong USD over the last couple of months, coupled with overseas weakness has had the effect of pushing down prices for commodities and imported goods thus weighing on consumer prices. This all means that the prospect of inflation hitting the Fed’s 2% target is being pushed further into the future.
With policy makers globally holding their breath amid concern over a China-led slowdown, the Bank of Japan's statement on Friday will be watched keenly by investors. Thursday is the final day of the Chinese Communist Party plenum.
The Non-Farm payroll numbers released at 13:30 GMT next Friday 6th November once again become key and could prove pivotal in the Fed’s decision at the next Federal Open Market Committee meeting ending on the 16th December.
Traders out there please be vigilant as we will undoubtedly see extreme volatility in the markets at this time.