The odds that the Fed will raise interest rates in 2015 must surely be zero. 2016 must be the favorite, and in fact I am now calling June as the soonest – unless economic data improves significantly. Signs are that things are actually declining and June might be too soon.
In August I had suggested 2016 was more appropriate. I am now more convinced than ever that rates will not rise now until at least June 2016. Friday was a bad day for those that wanted a sign the Fed would plump for 2015. First the newspapers carried stories exploring the growing capital flight from emerging markets (EM). EM’s will suffer a net out-flow for the first time since the 1980’s and this will put a great strain on a number of economies. Second, the jobless data in the US was disappointing which suggests the US domestic economy is not strengthening as much as expected or desired.
In today’s US print edition of the Financial Times the front page article was titled, “Capital flight darkens economic prospects for emerging markets”. The story is that capital is no longer flowing into what was thought to be high growth potential markets. With the potential that the US will raise interest rates, the capital flight will likely only get worse as money chases the more stable and higher returning opportunities.
But such an action by the Fed would bring home chickens to roost. China’s economy is already slowing – and if EM’s starts to struggle, gravitational forces will become hard to resist. The feedback loop will push commodity prices lower, and these act as input prices to US and European economies, thus pushing those economies closer to deflation. So the US will not want to push rates up without regard to global economic conditions. This was in fact the reason given by Fed Chairwoman Janet Yellen two weeks ago when the Fed did not raise rates. Just two weeks before the market had assumed a rate rise was imminent.
Second, todays (Friday) news regarding job creation in the US in September was disappointing. It slowed sharply to 142,000, compared to an expected 201,000. August and July was also revised down. The Fed has stated that employment, wage growth and inflation are its metrics it looks to to guide its “data driven” policy changes. This data is not good and in fact bad enough that the Fed will again be nervous of putting rates up at its next opportunity. This CNBC article is very concerning and highlights data that will ensure Ms Yellen’s coffee will be strong and long: Why the Job Picture is Even Worse Than You Think.
Bottom line – data suggests that the chances for a 2015 rate hike are virtually eliminated. The same kind of data for the next two months would have to be outstanding, even unbelievable, for the Fed to put rates up in February. So much now has to come right for the rise; June is best bet but even that might be too soon.