Will the FOMC raise the key interest rate and announce a plan for quantitative tightening?
In January 2017, the Fed chairperson Janet Yellen, delivered a fairly hawkish statement, indicating that the Fed would raise the key interest rate three times during the year, if both herself and her committee, felt the USA economy was robust enough to cope with the rises. True to her commitment, the rate was duly raised in March and once again in June.
The June rate surprised many analysts, as it was announced whilst inflation was reducing. The Fed also began to open up a window of dialogue in relation to what’s become termed the “great unwind”; how the Fed reduces, through what’s become termed “quantitative tightening”, a balance sheet that’s ballooned to $4.5 trillion, from the $1 trillion level in 2017, enlarged in order to rescue and or stimulate the USA economy, through an aggressive and experimental, stimulus programme.
Arguably, much of the hard economic data favours a third (perhaps final) rate rise announcement of 2017, when the FOMC conclude their Wednesday meetings. The contrary position is that: inflation is still below the target of 2%, wages are stagnating, GDP growth has only just recovered, there’s hurricanes/tropical storms to recover from financially, etc. In short there’s still some slack, which the domestic economy could reduce, before another rate rise is risked.
Then there’s the issue of the U.S. dollar to consider; its fallen off a cliff versus many of its peers since Trump won the presidency, good news for exporters and manufacturers initially, as a cheap dollar (in theory) encourages sales and stimulates growth, but the imported retail costs eventually hits manufacturing costs, unless all materials are acquired domestically. The FOMC will be aware that the Goldilocks period for manufacturing, may be coming to an end. They’ll also be aware that the USA is a massive net importer and that circa 80% of the economy is underpinned by the consumer spending nearly every last dollar they have; savings ratios are languishing near all time lows of 3.5%. A slightly higher dollar may be considered a benefit for the economy, in the short to medium term.
The general consensus, from the economists polled by news agencies Bloomberg and Reuters, is for no change, from the current key borrowing rate of 1.25%. However, should the rate remain unchanged, attention will very quickly focus on the accompanying narrative delivered with the publication of the decision, as investors will immediately scour both the written and spoken word, for any detail regarding the timing of a potential balance sheet unwind.
Key economic data, regarding this economic calendar event
• Interest rate 1.25%
• GDP growth YoY 2.6%
• Unemployment rate 4.4%
• Inflation rate 1.9%
• Govt debt to GDP ratio 106%
• Average hourly earnings 0.1%
• Wage growth YoY 2.95%
• Private debt v GDP 200%
• Retail sales YoY 3.2%
• Personal savings 3.5%
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