Fretting over the Fed

September 11, 2015

The dollar was in retreat in the latter stages of yesterday, to levels last seen at the early part of the month (at least on the dollar index), with most of the gains coming against the euro and Aussie dollar. Sterling was also buoyed by the fact that we saw rates on hold and one member still voting for higher rates, whereas there were some thoughts that we would see that one member fall back into line with the majority. For today, we have just PPI inflation data in the US to look at come 12:30 GMT, but we are unlikely to see markets get overly excited by that.

We are getting into the home stretch with regards to the outcome of the September FOMC meeting, the result of which will be known Thursday of next week. The volatility of stocks markets has calmed down in recent sessions, but the Fed has to look a lot further that then day to day volatility of financial markets when setting policy. Markets reflect the here and now, whereas policy is set for the coming year to 18 months, as its impact works with lags on the underlying economy. The continued downward pressure on global commodity prices is a factor that is likely to keep them from hiking rates come next week in my opinion, but opinions are divided, both in markets and on the FOMC itself. As such, the statement will be crucial in shaping the market reaction and determining whether a further easing will be priced for this year.

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