Future, Central Bank, Monetary Policies, FOMC, fx trader, forex

Considering that the Chinese economy is set to continue slowing in the months ahead, does this mean that the Fed will not move until well into 2016 or even 2017?  I was asked this very question when speaking to a South Korean radio station the morning after September’s decision and whilst I am still of the view the rate hike will come soon (very late 2015 or early 2016), it’s not totally unfeasible that it could happen well beyond then.  As in the words of Janet Yellen the decision remains not only data dependent, but on the global backdrop, so all eyes remain on US inflation figures, the labour market, consumer confidence as well as the situation in China going forward.

The US data will not only be monitored closely by investors, but by central banks around the world.  With inflation remaining stubbornly low in many developed economies in particular the Eurozone, despite all of the ECB’s efforts, it is very hard to see tightening start until we see deflation risks dissipate globally.  We know the ECB is going to keep their Quantitative Easing (QE) program going until September 2016, as inflation in the Eurozone is unlikely to get back to its target before then and at the ECB’s last meeting Mario Draghi reminded us that his policy will continue if inflation remains low.  So the possibility of the ECB continuing to print money as far away as 2017 is a distinct one, meanwhile interest rates elsewhere are likely to be cut at the Reserve Banks of Australia and New Zealand to name but two.

So everything hinges on the Federal Reserve but their hands are tied by many things beyond their control.  One thing is highly probable and that is when they do commence their tightening cycle, other central banks won’t necessarily be in any rush to join them.

Angus Campbell
Senior Analyst