With US Federal Reserve interest rates at a record low and the US economy seemingly robust compared to Japan and the Eurozone, the only thing that rates can do is to stay where they are or increase. At the moment, in the USA and much of the rest of the world, inflation is at historic low levels. A classic reason to increase interest rates is to “tighten” the money supply with the aim of choking off inflation, so there would seem no likelihood of the Federal Reserve acting on rates for this reason in the foreseeable future. A rate rise has been the subject of near continual speculation since the Federal Reserve announced the “Taper” where by it would ease back on its asset purchasing programme that sought to boost liquidity in the US economy (and keep long term mortgage and US sovereign borrowing costs low). The Taper started in Q4 2013 and ended a year later, of course, but the programme of reduction itself didn’t start until the Fed judged that unemployment had fallen far enough and the economy was robust enough to withstand the removal of support.
Perhaps the only real reason for the Fed to increase rates would be to gradually give it room for manoeuvre before the next (cyclical) downturn arrives and therefore have some leverage over the economy. Speculation that a rate rise was imminent (and the majority of pundits were saying that rates would rise in March of April when making their prognostications last year) has been credited with fuelling the Dollar’s Bull Run. On the other side of the pond, the start of the ECB’s QE programme and the election of Syriza to rule Greece on the back of promises to send the Troika packing, reverse austerity measures and slash Greek debt through a haircut has put significant pressure on the Euro. The Euro fell by 9.4% against the Dollar over Q1. The upshot of this is that US goods are being priced out of the Eurozone whilst Eurozone goods look like bargains in the States – the Federal Reserve is unlikely to want to see this problem worsen. Whilst it has no control over a potential “Grexit”, it does control the timing of a US rate rise which would see the Dollar appreciate.
In a Bloomberg article, it was suggested that the Federal Reserve is unlikely to raise rates before the end of November. Clearly, with no compelling reason to act on rates in the near term, the Federal Reserve is likely to play a wait and see game.