For the next 12 hours’ capital markets may fret as to what decisions the Federal Reserve will come to in regard with what to do with interest rates. Has the economic picture stabilised enough for them to announce a rise in interest rates? Despite warning the market at the last meeting that they still anticipated moving before the year-end, after the lack of action in September, expectations are for rates to stay where they are. Should the committee announce a rate rise later today, there is no doubt it would take the market by surprise.
Will the committee consider the timing is right? According to the Economic Cycle Research Institute’s US coincident index, a composite measure of aggregate output, employment, income and sales, economic growth has been slowing all year. In their view raising rates now would put them on a collision course with the US economy. Their leading index is below where it was at the start of the last recession. September’s new orders for durable goods for fell for the second straight month, reflecting the continual lacklustre picture at the factory gate. The service sector, which makes up the bulk of the economy, likewise declined this month. The Markit services purchasing managers index, also released on Tuesday fell to 54.4. All of this data does not lead one to believe the Federal Reserve should be debating a rate rise at this point. It may well be that the Federal Reserve will come out with a more dovish stance than at the last meeting, virtually removing the possibility of a rate hike in December.
Keeping rates at zero is unlikely to be the Federal Reserve desired course of action, zero rates for over 20 years in Japan has not helped their economy. Zero rates can encourage excessive risk taking, increasing the possibilities of defaults. The Federal Reserve are batting on a sticky wicket.
George Osborne has not had his best couple of days; the Lords pushed back his tax credits proposals and on Wednesday third quarter GDP came in below expectations. Once again pushing back the case for raising interest rates on this side of the pond.
Where does all this leave equity market again, possibly continuing to face a balancing act? On the one hand the state of the global economy remains in question, on the plus side as Mario Draghi suggested last week, central banks are continuing to offer little in the way of alternatives.