Group Economics
Macro Weekly Will the Fed hike?
Nick Kounis +31 20 343 5616
11 September 2015 The FOMC meets next week to decide on interest rates. Analysts are split on whether the Federal Reserve will raise interest rates for the first time in nine years. The Committee itself also seems split. This reflects conflicting signals. Domestic economic strength signals that the Fed should act. However, a range of external forces – from emerging market risks, commodity prices and the dollar - suggests that it should keep interest rates on hold. On balance, we think the Fed will decide to wait. We expect an interest rate increase in December. The most interesting FOMC meeting in years
Market expectations for the fed funds rate
As far as the outcome on interest rates is concerned, FOMC
Implied rate from 30-day fed funds futures, %
meetings for a number of years have been non-events. There was virtually no chance of any kind of move. The focus has been exclusively on Fed commentary to try and get hints about
1.00 0.82 0.80 0.65
future policy. Next week’s meeting is different. There is a real chance of the first interest rate hike in nine years.
0.60
0.52 0.39
0.40
Analysts are split but edge towards a hike According to the Bloomberg poll at the time of writing, economists are almost split down the middle on whether the Fed will move or not. Of the 81 economists in the survey, 39
0.20
0.32 0.20
0.00 Q3 15
Q4 15
Q1 16
Q2 16
Q3 16
Q4 16
expect the Fed to leave its target range for the fed funds rate at 0-0.25%. Meanwhile, 42 expect a 25bp increase, which
Source: Bloomberg
would take the range to 0.25-0.5%. That means that on balance the median is for an increase, though it is a close call. Markets tilted towards no change Financial markets on the other hand, appear convinced that there will be no change. The fed funds rate usually sits in the
Arguments on both sides The split in opinions reflects that strong arguments for and against raising interest rates, as well as the fact that the Fed has to balance progress towards a dual mandate, with the
middle of the target range. It is now at 14bp so if the Fed were
central bank aiming for both full employment and an inflation
to hike the fed funds rate, it should rise to just under 40bp. The
goal of 2%.
implied federal funds rate from the October 2015 future sits at around 20bp. So markets are pricing in only a small chance of
Robust economic growth
an increase in the target range. Separate calculations from
The case for a rate hike rests on the strength of the domestic
Bloomberg imply that markets attach a 28% chance of a move
economy. Economic growth has been quite volatile on a
next week. Though that rises to 60% at the December FOMC
quarterly basis, but in the year to the second quarter, the
meeting.
economy grew by 2.7%. This almost certainly above the economy’s trend rate.
FOMC members are also split There is an old joke that if you put two economists in room you will get three different opinions. The split among market economists is also mirrored by vastly differing views among the members of the FOMC. At Jackson Hole, more hawkish
Labour market strength This view is supported by labour market developments. Over the last year, employment has grown by around 240K each
members – such as James Bullard – argued that the Fed was
month, a very healthy level historically. Over that time, the
still on course to raise interest rates in September, despite the
unemployment rate has fallen by around one percentage point
market unrest. More dovish members – such as Bill Dudley –
to 5.1%. It is at a relatively low level historically.
said that the case was now less convincing. The Vice Chair Stan Fisher sat on the fence saying it was ‘premature’ to make that call.