Ever since the Taper ended, each meeting of the Federal Reserve has been eagerly anticipated at the meeting when the near zero interest rate in the USA will come to an end and rates will start their long journey back to historically normal rates, but that journey has yet to begin.
A factor which led the Fed to hold off on a rate increase last month was that employment creation levels had trended down (although overall unemployment remained unchanged). Additionally, markets in the USA and around the world were nervous about the faltering rate of growth in China. A US rate hike will have a knock-on effect in other economies, but the remit of the Federal Reserve is employment and price stability within the USA, so this can only be a derivative factor in their decision making.
Two factors make it unlikely that rates will rise this month. Firstly, US retail sales grew at a slower pace than anticipated, rising only 0.1% last month, just half of the expected rate. There has been speculation that jitters over the weaker job creation data has made consumers more cautious about spending, but this is unlikely since human nature dictates that people assume themselves to be immune from job losses and besides, we are experiencing a slowdown of job creation rather than an increase in unemployment. Car sales enjoyed a bit of a bounce, but if sales of building materials and fuel are stripped from the data, “core” sales fell back by 0.1%. Secondly, a report, produced by the Federal Reserve itself, suggests that a stronger Dollar is hurting growth and stalling manufacturing output (clearly of goods intended for the export market since the external value of the Dollar has no direct effect on internal demand since everything is priced in Dollars anyway). When the interest rate does rise, it is expected that the US Dollar will appreciate against other major currencies since the (negligible!) yield on Dollar holdings will improve, making the Dollar more attractive and hence pushing it higher.
It remains likely that the Fed will take a cautious approach to normalising interest rates, so if the portents for the economy in terms of inflation (running well below target at 0.2%), job creation and consumer spending are lack-lustre, the rate will stay on hold. An increase (theoretically) would rein-in inflation and bolster the Dollar on Forex markets – is now the time for such a move?