Marc Ostwald, strategist at ADM Investor Services International, presented a detail preview of the Fed rate decision due today at 19:00 hrs London time. The key message that comes through from Ostwald’s analysis of Fed policy is that the central bank is at least 100 basis points behind the curve considering the strength in the US economy.
However, that does not mean the pace of policy tightening would pick up from now on. Ostwald states the recent improvement in the data means there is little room for Fed to hide behind the veil of weak economy.
Key points
Certainly no chance of Fed rate move today. However, meeting is interesting as strong economic data means there is nothing the Fed can hide behind.
Dollar is still world’s funding currency and US banks still vulnerable to negative feedback loops from international development.
Fed speakers are not particularly happy about putting off rate hike. They are also not particularly concerned about Brexit as it is seen having little or no impact at all on the US economy.
Fed will have to open the door for a move in September. The question is how they would do that, because August is generally bad month for equity markets and thus they would have to slam the doors on rate hike in September again if we have a bout of risk aversion in August.
Fed is at least 100 basis points behind the curve.
US – only 11% of GDP is through exports. It is little dependent on exports.
Fed was enormously complacent before 2008 crisis, while now they are extremely cautious.
September Fed rate hike bets currently stand at 28%, which is very low. Historical data show Fed avoids lifting rates if equity markets aren’t comfortable. Fed may try to bump up September bets today.
Japan – Abe announced stimulus worth JPY 28 trillion, but the program actually involves only 13 trillion of spending. About 7 trillion is reallocation. So overall it is only 5 trillion stimulus package. All this won’t address the problem of low inflation.