What a difference a day makes. Just last week, it seemed certain that after months of speculation, the Federal Reserve would introduce an interest rate increase by September at the latest. But the U.S. doesn’t exist in a vacuum and world events have changed and a rate increase now seems in doubt.
Just last week, U.S. employment numbers came in as expected and the central bank’s first rate hike in more than nine years was a slam dunk. Just as the Fed was about to strengthen the U.S. dollar, China devalued the yuan and global deflation is seen as creeping in.
At the same time, economists are seeing a leveling of productivity and are doubtful if U.S. growth will be anywhere near the 3 percent predicted by Wall Street analysts dropping the possibility of a rate increase down to 39 per cent from a 50 per cent chance just a few days ago. If the rate hike does happen in 2015, December would be the next possible feasible date but Goldman Sachs seems to stand as one of the few firms that follow this assessment.
Current Rate not Accceptable
Maintaining the current near-zero rate, however, is not considered by many analyst to be justifiable and many strategists are pointing to economic factors that make a September hike necessary.
According to Quincy Krosby, chief strategist at Prudential Financial, "We are not in an emergency situation. Where rates are now is indicative of an emergency. The Fed right now is thinking, why are we keeping rates this low for this long?"
Market reaction to the uncertainty was swift Wednesday, with 10-year treasuries moving lower and the dollar dropping more than 1.1 per cent against most currencies.
"Things can change by September,” Krosby said. “The Fed has no magic crystal ball…..The 10-year yield is telling you no rate hike in September. But that can change, and it can change quickly."