The US economy and the path of interest rates have lost a bit of focus with the ongoing Greek debacle but it is interesting listening to and reading the miriad of commentaries on whether it is time to raise rates or whether it is too soon. The bottom line is that no one knows. Short term data continues to be scrutinised and if we do have a rate rise in September it is likely to be more of a policy decision than any real economic justification. A signal to the markets that times are changing. From a fundamental perspective inflation continues to be low and whilst wages are picking up one can argue that we need some real momentum before the economy can withstand rates rising.
However, it is likely that we see just 25bps, which is neither here nor there. It would only be a sustained programme of rate rises from September onwards that would cause a problem. I do not see that scenario at the moment.
Data is not helping. Except for consistently strong employment numbers, we are getting mixed messages from the rest of the data. US data and forecasts (Market watch). It is good but not that good. Today’s Housing Starts and Building Permits are a case in point. Building Permits were strong yet Housing Starts were a bit weaker than expected but still showing positive momentum from the winter. Reuters on housing
Q2 is going to be key, as I have said many times. We need to see good housing starts, industrial production data and even a gradual rise in inflation for a September lift off to be justified.
The current issues around Greece and the increased likelihood of some kind of default or another payment deferral are causing a lot of market weakness at the moment. If Greece does default then the subsequent market turmoil might be enough for the Fed to put any thoughts of a September rate rise on hold for the time being. Risking a double whammy of market turmoil might put the brakes on the nascent recovery and that is certainly not what the Fed wants.
Interesting summary of what Greece owes in the FT: What Greece Owes. Continuing to play this out in the public domain is hardening attitudes and is not helpful: Tsipras and the IMF (The Guardian).
USD strength has also acted as a monetary brake on growth and the Fed will be well aware that managing this along with rate rises whilst not pushing the economy back into recession is key. Greece should cause some Euro weakness and a corresponding move higher for the USD. If we do see rate speculation increase then we should see a stronger USD in H2 2015. That could also put some pressure on Emerging Markets.
Its data, data and more data. Greece is the short term issue and could influence the Fed’s decision. I suspect we will hear more positive language today but without giving too much away in terms of a September rate rise.
Bond Muse Senior Fund Manager with 20 years of experience at various asset management firms. Has covered the whole range of Fixed Income Instruments from Government Bonds to High Yield