Fed Rates Hike Just around the Corner

Since seeing the signs of recovery in the US, we have been hearing that the US rates rise is just around the corner. Some are in support and recommend that this happens sooner than later, and on the other hand many are against such moves as it may very well bring down the fragile recovery.

Overall, I do see that the rate rise is looming and very likely to be in the near future. Fed Chair Janet Yellen has adopted a ‘wait and see’ approach. This means that the Fed is highly dependent on improvements in US data and the overall global outlook, giving no clear indication on the timing of the rise in rates.

Yellen's recent testimony confirmed that the US economy is improving and the Fed is on track to raise rates this year. She would like to take action now and move gradually rather than more aggressive rates rise later.

August saw one of the most forceful selloffs in the markets over heightened fears over raising rates and the situation in China. Dow became a victim of a 1000 point loss in a day. We immediately saw Fed members delivering dovish notes to the market to calm fears despite continuous strong data in the US.

Considering a few key elements in favor of the rates rise, we have two main factors here, one is a solid job growth and the second a strong rebound in the Q2 GDP figures. Growth in the US employment economy has generated an average of 260,000 jobs per month over the past year with weekly jobless numbers on a constant decline.

We did see a 215k non-farm payroll data lower than the expected 223K, but still very much above 200K, which suggests a good growth in the unemployment rate, which is at 5.3% for July.

GDP growth in Q2 shows an increase from the print in Q1 despite being hit with a harsh winter, property market and a strong dollar. The headline print was slightly below consensus at +2.3% where +2.5% was expected. The main driver here was consumer consumption at (+2.9% vs 2.7%, expected).

The Q1 GDP print was also revised up to 0.6% from -0.2% previously. If we want to gauge the growth and stability, the improvement in GDP and the upward revision of Q1 supports evidence of this.

Looking Ahead

The Fed seems to have taken a step back due to the nervous tone of the market following dramatic equity index falls around the world. China's actions to devalue its currency has escalated deflationary risks in the Western developed world and to hike rates right now would further damage emerging economies.

The main focus is now on September non-farm payrolls, if we see a solid number above 200k, it will be enough to elevate confidence within the Fed despite the concern over China and market.

The Fed certainly will have enough fundamental data to validate pulling the trigger to begin the tightening of monetary policy. If September seems too close to bring the rise in interest rates, we will see a rise by December this year.