Janet Yellen, the Fed chair has consistently hinted of a fed rate hike this year. A number of analysts estimated tightening to happen in June after the FOMC (Federal Open Market Commision) meeting. That did not happen and now analysts are predicting a September or November hike. A significant number of analysts especially those from Societe Generalle believe the hike will come in 2016. The IMF has advised Yellen not to hike interest rates this year. After reading the FOMC meeting minutes, I am now convinced that the rate could be delayed.
Slowdown in China
China is the leading emerging market and what happens there has deep implications globally. In fact, the IMF has reduced the global economic growth outlook from 3.5% to 3.3%. In the past week, the Chinese stock market has lost more than $3 trillion. Before the meeting, the Chinese market had not started its nose dive in what many are calling the end of the Bull Run. Many experts and traders believe that despite the measures put by the Chinese government, the end of the run is near. In the minutes, the fed committee pointed out that the Chinese and Japanese markets were doing extremely well. The Shanghai composite had just reached all-time highs. Depending on how this issue continues, chances are that the Fed might delay hiking interest rates.
The crisis in Greece which has just become the first developed country to default was very significant in the meeting. According to the minutes, the officials were optimistic that the European Union would agree to bail out the country and end austerity. They were wrong. The country defaulted and went ahead to call a referendum in which the country rejected the ‘dictatorial’ offer made by the creditors. Thing is, in case Greece is forced to leave the Eurozone, the effects will be felt far and wide. This week, Greece was given until Sunday to come up with an offer. Today, the officials stated that they had submitted a proposal to the Eurogroup officials. The market reacted positively. Fed officials intend to raise the rates when the volatility in the country is over.
Some officials are uncomfortable
In the minutes, I observed that a number of fed officials such as Charles Evans believe that hiking the rates right now would be a bit premature. They believe that the American economy has not reached the best point to hike. This is particular blamed to the labor market despite the fact that the labor market is doing well. In June, it emerged that the number of people filing for jobless claims has gone higher. In the minutes, it was also noted that the GDP and inflation were ‘tilted a little’ to the downside. As such, the ‘monetary and fiscal policy’ are not positioned to rise grow the economy.
They are ready to wait for more data
In April, Janet Yellen stated that they will use the economic data to decide on the hike. Ideally, the fed raises interest rates when the economy is doing well to reduce inflation levels. This cautions people against rising commodity prices. In the minutes, it was noted that, “Many participants emphasized that, in order to determine that the criteria for beginning policy normalization had been met, they would need additional information indicating that economic growth was strengthening, that labor market conditions were continuing to improve, and that inflation was moving back toward the Committee’s objective”. In this regard, the committee members agreed to meet on a regular basis to assess the upcoming data.
In the meeting, the fed officials agreed to update the market on the details of the rate hike before the hike. By giving the traders information on a regular basis, it will prepare them efficiently to make the right decisions. An abrupt announcement of the rate hike could lead to very serious losses in the forex market.
As a trader, you must be on the lookout for to avoid being caught off guard in the interest rate decision. You must remain vigilant to listen to the FOMC members’ speeches and what they write. This will give you an excellent opportunity to position your trades in the best way. In addition, you must understand that a lot can happen in one day in the financial market. In fact, it took less than a week for the Chinese bourse to wipe out more than $3 trillion.