As the Federal Open Market Committee (FOMC) meeting ends in a few hours, it will announce whether it has decided to up short-term rates, denoted by the Federal funds rate, a decision it last took in 2006.
Interest rates in the US have been near zero since the global financial crisis of 2008-09. The US economy, supported by the grandest fiscal and monetary stimulus experiment in economic history that was launched in the crisis’ wake, has recovered well.
In seven out of the past 13 quarters, the economy has clocked over 2 percent growth (highest being 5 percent last September), unemployment has fallen to the lowest in 7 years to 5.3 percent while other macro indicators too are strong.
All this makes a rate hike a shoo-in. But there’s only one problem.
The rest of the world economy has been struggling, chiefly led by China, which almost single-handedly rescued the global economy in 2008.
So even as the Fed is technically responsible only for the well-being of its own economy, given that its decisions will have an impact on the economies and asset classes globally, it is caught in a quandary.
Fed chair Janet Yellen has in the past maintained the central bank would watch out for macro data but her language has swung from being dovish to hawkish different times.
What do experts say?
A CNBC poll says 49 percent traders expect the Fed to hike rates today and they have brought forward their expectations timeline to it shrinking its balance sheet to going up to its terminal rate of 2.69 percent by September next year.
Emerging markets have few options: Fed hikes and but comes out with hawkish, neutral (saying it would be data-dependent going forward) or dovish (says no more hike in the near future) language.
The other options if the Fed doesn’t hike but keeps the markets on tenterhooks by saying it will consider one soon. The final option is the Fed doesn’t hike and does not sound positive on its economy.
Each scenario could have its implications on the markets globally, particularly emerging markets which are heavily dependent on foreign flows.
“If the Fed hikes but sends out a positive language, it would be good for markets,” stock broker Dipan Mehta told CNBC-TV18, but he added that volatility could spike in the near term.
Nick Parsons of National Australia Bank said the Fed is likely to leave rates unchanged, maintaining that between a ‘dovish hike’ and a ‘hawkish pause’, it will likely go with the latter.
This would result in uncertainty staying in the markets for another few months, he said.
Morgan Stanley’s Ian Stannard also said he expects the Fed to pause but said that a rate hike could put pressure on asset classes globally, particularly in emerging market currencies and stocks.
“We expect them to hold off till December,” he said.
Describing the decision as a ‘coin toss’, Manish Sing of Crossbridge Capital said Indian investors should buy shares if the Nifty corrects to 7,500-7,700, adding that they should watch out for stimulus events arising out of China and Japan by October, which could re-ignite the global bull market rally in stocks.