United States: Is the Fed trying to nudge expectations?


Recent weeks have seen the release of US data that could reduce the likelihood of a Fed rates increase.

Following the publication of an underwhelming job report (except for satisfactory job-creation levels) and a sharp fall in both the manufacturing and non-manufacturing ISM indices, the markets could have reflected a sharp reduction in the probability of rate increases. However, recent comments by various Fed members appear to back the possibility of a rate increase at forthcoming meetings.



The fall in ISM indices is surprising because the other indicators are not sending the same signal. The PMI indices, despite being based on the same methodology as the ISM indices, posted much shallower falls: PMI respondents made no remarks confirming the ISM falls, nor were any such comments evident in other qualitative surveys, such as the Fed’s Beige Book. In addition, weekly jobless claims remain very low. This shift is intriguing and heightens the need to watch the situation closely, but the most likely explanation is that this was an outlier and that the ISM indices will recover shortly.

Monetary policy always has a relative component and the various central banks position themselves in relation to their counterparts, given the impact of their decisions on currencies. Measures to loosen monetary policy by both the ECB and Bank of Japan had probably influenced the Fed’s decision to delay its rate-increase cycle, however in a move that surprised market expectations, the ECB did not ease monetary policy on September 8th.

Several FOMC members, some of whom are considered ‘dovish’ such as the president of the Boston Fed, have spoken in favour of a rate increase very shortly. If Lael Brainard’s speech on September 12th has a similar slant, this would indeed be a strong signal.

These elements seem to show the US central bank’s desire to raise its key rate, but with increased consideration for the impact of its actions on the financial markets. The resilience of emerging markets despite the rising probability of Fed action, the dollar’s relative stability, and a stock market that is trading close to record highs, all open a window of opportunity that the Fed may want to take advantage of on September 21st.

The opinion expressed above is dated September 9th, 2016 and is liable to change.

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Julien-Pierre Nouen

Directeur des études économiques et de la gestion diversifiée