US Federal Reserve will hike interest rates - just not this week

US Federal Reserve will hike interest rates - just not this week

The US Federal Reserve is expected to leave interest rates unchanged on Wednesday amid weak inflation and ongoing turmoil in global financial markets.

SINGAPORE: After lifting its benchmark interest rates from near zero last month, the US Federal Reserve is likely to hold off on a second rate increase when it issues its policy statement on Jan 27.

The decision, which follows December’s historic decision to raise interest rates by 25 basis points for the first time since 2008, is due at 2 pm Eastern Time on Wednesday.

“I would be surprised if the Fed raised rates this week,” John Petrides, manager director and portfolio manager at Point View Wealth Management, said in an email interview. “Not only have global markets sold off, economic data in the US is coming in just ‘ok'. The jobs data has been very good, but inflation has been tame.”

US nonfarm payrolls surged in December, while unemployment held steady at a seven-and-a-half-year low of 5.0 per cent, indicating that the economy remained on solid ground.

However, consumer prices fell last month, and with global oil prices taking another leg down to US$30 a barrel, the Fed’s inflation target of around 2.0 per cent seemed out of reach still.

In addition, a month-long plunge in US and global equities, driven by China-related jitters and the persistent downturn in crude oil prices, has stirred concerns that an abrupt global slowdown could weigh down the US economy. The Fed had indicated that it was paying attention to global economic and financial events following a bout of market turbulence last summer.

“The Fed is very mindful of what’s going on in other parts of the world and the American stock market so it might err on the side of the caution this time round,” David Kuo, CEO of The Motley Fool Singapore, said.

However, there are analysts who caution the Fed against placing too much focus on market and economic volatility that could prove to be temporary.

“The Fed should not be making monetary policy decisions based on the daily movement of the Chinese stock market, but rather on the health of the US economy first and the global economy second,” Mr Petrides said.

“Let’s not forget, the Chinese stock market rose 100 per cent from July 2014 to June 2015. Did anyone ask the Fed if they would alter their policy decisions based on that? No,” the New Jersey-based analyst added.


Dealers will be closely following the rhetoric coming out of the US Federal Reserve when it ends its policy meeting Wednesday. (AFP/Timonthy A. Clary)

WHEN IS THE NEXT RATE HIKE?

For now, the Federal Open Market Committee’s (FOMC) forecast points to four quarter-point rate increases which will take the Fed’s key overnight lending rate to around 1.25 per cent by end-2016.

According to Fed funds futures, markets are pricing in a 30 per cent chance of a March rate hike, a move that would make the scenario of four hikes over the year more plausible.

"The expectation is for four rate hikes to happen this year so if the Fed doesn’t do one in January, they will have to do one in March,” said Mr Kuo. “I think that’s likely to happen because the volatility would have subsided and that gives them a window of opportunity to raise rates.”

To be sure, there are other analysts who are less ambitious with their predictions. Shane Oliver from AMP Capital, for instance, believes that the Fed “will struggle to put through even one 25-basis-point rate hike this year”.

“The Fed won’t be making any changes to monetary policy this week but is likely to be dovish in acknowledging the latest downside risks to inflation and support the view that a March hike is now unlikely,” said Mr Oliver who is the head of investment strategy and chief economist at the investment house in Sydney.

Source: CNA/sk