While the Dollar has turned slightly lower as trading for the new week has commenced, the major currency rebounded and moved significantly higher at the conclusion of last week with this pressuring other major currencies like the Euro and British Pound. Part of the reason for the rebound in the Dollar was attributed towards encouraging inflation figures for the month of August, but you can’t help but wonder whether investors were also readjusting their positions in advance of the Federal Reserve interest rate decision scheduled to take place on Wednesday evening.
Although the current market expectations for a US interest rate rise in September are only around 15% and there would be a great deal of controversy if it were to take place, we can’t completely rule a Federal Reserve interest rate rise out of the equation. There have been
Let’s take a look at a couple of different possible scenarios that we could see if the Federal Reserve hypothetically raised US interest rates this coming week:
With a hypothetical US interest rate rise this Wednesday sure to create controversy and catch the markets off guard, would there be any central banks who would look favourably at the move?
I believe that the Bank of Japan (BoJ) would applaud any action taken by the Federal Reserve, because this would enhance buying attraction towards the Dollar and weaken this ongoing appeal towards the Japanese Yen. The correction in the Japanese Yen throughout 2016 has provided a massive headache to both the Japanese economy and the BoJ, and it can’t be stressed enough that the Japanese central bank must be under intense pressure to come up with a solution to weaken their currency. The only problem with this is that it would require a change in market sentiment for the BoJ to be able to focus on weakening their currency without opposition from investors, meaning a US interest rate hike and change in market sentiment would be something that the BoJ would applaud at this point.
With a US interest rate hike in September sure to cause panic and controversy, should the Fed act?
No, the Federal Reserve should not be raising US interest rates this month. The markets are completely unprepared at this point for another US interest rate increase and the financial world would be in shock if the Federal Reserve raised US interest rates this Wednesday evening. Ongoing concerns over the global outlook and weaker trade is leading to economic downgrades becoming regular occurrences, however the Federal Reserve appear determined to maintain their bias and stance towards raising US interest rates higher in 2016. I can’t help but wonder that one of the underlying reasons for the ongoing comments indicating a bias for higher US interest rates is due to the Federal Reserve commencing 2016 with a very naive intention towards raising US interest rates four times in 2016.
This was quite simply never going to happen and not only have interest rate expectations been pushed back repeatedly throughout this year, but the credibility of the Federal Reserve will suffer if they are unable to carry out their pledge to raise US interest rates at least once in 2016.
What is the most likely scenario to take place?
With the market expectations of a US interest rate rise at around 15%, the most likely scenario should be that US interest rates are left unchanged on Wednesday evening. Bearing in mind that several Federal Reserve officials have in recent weeks strengthened their calls for higher interest rates, it should not be a major surprise if we begin to encounter some dissenters voting for an interest rate rise as early as this month. This might present the scenario to build a stronger case for a US interest rate rise at the end of 2016, which would at the very least allow the financial markets to prepare for another increase in US interest rates in advance.
If the Federal Reserve are going to maintain committed towards raising US interest rates in 2016, the best case scenario for all involved would be for Federal Reserve Chair Janet Yellen to begin gently preparing for markets for a US interest rate rise in December much like she achieved in December 2015 with comments in November of that year.
This type of statement would at least allow the financial markets to absorb in advance the probability of higher US interest rates, which is ultimately why the accompanying statement following Wednesday’s decision is where the markets can begin to take the intention of the Federal Reserve towards raising US interest rates in 2016 more seriously.