The ECB failed to fulfil the expectation on Thursday that they would increase their bond purchase program, they did however increase the cost of depositing money by a further 10 basis points. Savers in Europe are currently faced with depositing funds, and paying for the privilege, in a potentially fragile banking system, or buying equities for income and hoping that the income will compensate for the potential capital loss. The ECB did extend the bond purchase program into 2017. At the start of the week, consensus expectations were that the ECB would increase its bond purchase program and the Fed will put up rates for the first time in 8 years on December the 16th. With one event out of the way, what odds now the Fed will once again back off from the expected rate rise?
The Fed is almost conflicted in their desire to raise rates. As Janet Yellen pointed out earlier in the week, raising rates vindicates to the world all the policies that they have implemented over the past years. Leaving them where they are almost an admission of defeat. Aside from the falling unemployment rate, there is currently very little in the US economy to justify any change in rates. As we pointed out earlier in the week, some of the recent economic data would have tempted policy makers to take more liberal action.
Equity markets on Thursday took a turn for the worse, in what is now a familiar pattern ahead of a potential move by the Fed. Every time the Fed prepare the markets for a change in rate policy, in the lead up to the announcement the markets wobble. This then appears to give the Fed the excuse to postpone the decision. Thursday’s market move looks rather familiar in this respect.
Traders would have been running for cover today, as the euro rallied and the dollar sold off after the ECB meeting. Uncertainty will now return as to what the Fed will do on the 16th of December. Janet Yellen has backed herself into a corner, how do they justify not moving in December? They could leave themselves in the position they have so desperately tried to avoid. The Fed appear to have been dictating policy based on trying to anticipate the market’s reaction, as opposed to doing what they felt was appropriate and letting the market adjust accordingly. As in life trying to please everyone, often results in upsetting everyone. It is very likely now the Fed will achieve just what they wanted to avoid, dammed if they do and dammed if they don’t.