The Fed interest rate guessing game continues

The news the world’s largest economy added 295,000 jobs during February, coupled with a fall in the unemployment rate to 5.5 per cent, had bolstered anticipations that a tightening of monetary policy would happen sooner rather than later.

But recent comments from Fed chair Janet Yellen and the growing strength of the dollar have forced many economists to re-evaluate their positions.

In March, Ms Yellen altered her stance on interest rates, which have been stuck at a record low of 0.25 per cent since the depths of the financial crisis in 2008-09.

In its regular statement, the Federal Open Market Committee (FOMC) abandoned its pledge to be “patient” on interest rate rises, suggesting the central bank might be gearing up to raise rates for the first time since June 2006.

However, it added that it would need to see “further improvement in the labour market” and be “reasonably confident that inflation will move back to its 2 per cent objective” before it begins to tighten policy. As a result, markets swiftly tapered their rate-increase predictions.

Schroders’ chief economist and strategist Keith Wade now believes a rise in the base rate is looking more likely to happen in September rather than during the summer, although he said the situation remained “a close call”.

“The FOMC cut its forecasts for growth, inflation and future interest rates,” he said. “In short, the Fed sees more slack and less wage pressure than before, meaning it can take its time in making its first move.”

At the start of the year, Hermes Investment Management group chief economist Neil Williams was expecting a summer rise.

But following a recent meeting with former Fed officials he now believes tightening will not start until at least September. Thereafter, however, he said the Fed should move swiftly, and predicted a second hike in December.

“On the basis of the US’s relative insulation from global economic headwinds [and] the fall of unemployment [into the Fed’s range], rate hikes should extend through 2016,” he said.

Adrian Lowcock, head of investing at Axa Wealth, said the lack of decent wage growth, combined with a low inflation, was putting the US central bank under no pressure to move swiftly.

“The persistently strong dollar is going to put company earnings under pressure,” he added. “Inflation is the obvious driver for raising rates, but it is not there.

“All of this has galvanised my view that there will not be a rate rise in June. But a September rise is not set in stone either, there is the potential for any tightening to be pushed back until next year.”

Fed keeps putting issue of interest rate rise on to back burner

The guessing game surrounding a rise in US interest rates continues to keep investors on their toes.

Federal Reserve chairwoman Janet Yellen chooses her language very carefully about when rates will rise – and just when it seems it might be imminent, an element of uncertainty creeps in.

In her most recent statement, while the word ‘patient’ was removed, suggesting a rise could be close, emphasis was placed on the fact the economy would need to be firing on all cylinders for the Fed to press the rate-rise button.

As Brewin Dolphin’s head of research Guy Foster said, there was something in there for both ‘hawks’ and ‘doves’.

He added that Ms Yellen had been at pains to impress “should economic recovery play out as the committee expect, rate normalisation will still only be gradual”.

“Indeed Ms Yellen also went on to say that neither will rate normalisation be systematic, as had been the case with the [tapering of quantitative easing], noting the Fed may in fact ease policy should the data require it.”

This last point – that more stimulus could be pumped into the economy – echoes Newton strategist Peter Hensman’s comments to Investment Adviser in January, when he said: “Our view on the US is that given the way things are going, quantitative easing is as likely as a rate rise.”