Trainee Trader Jaz Singh’s article as to whether its too late for a Fed rate hike?

On December 16th 2015 the FOMC raised rates for the first time since the financial crisis of 2007-08. The hike was a mere 0.25 percentage points but its ramifications widespread. With rates being at the zero lower bound since 2008, this was a sign that the FOMC had enough confidence in the economy to begin its hiking path.

At the time, many expected 3 to 4 further rate rises during 2016. There hasn’t been a single hike this year with only 2 FOMC meetings remaining. Of these, only December seems feasible as a ‘live’ meeting, with the November conference so soon before the Presidential election.

So, what’s happened in the last 10 months for the FOMC to seemingly slow down their hiking path? Looking at the dual mandate, inflation has remained below the 2 percent target. Employment data is relatively strong but some slack remains in the labor market. Inflation and employment are the official metrics used by the FOMC in their decision making process. However, as the most influential central bank in the world, the Fed also looks to global elements when making policy decisions. In the past year, the FOMC has had to consider the ramifications of multiple macro events, with Brexit being the largest market mover.

A competent Fed needs to consider these macro factors; however, a concern remains that the hiking path is taking too long. Since 1960, the US has experienced 1 or 2 recessions per decade on average. Interest rates are the main tool available to central banks to combat these slowdowns in growth. As we know, rates in the US are near their lowest feasible levels. 8 years since the last recession hit, the next is probably overdue. If an economic slowdown were to develop over the next few months the Fed would have next to no downward leeway in the federal funds rate.

I believe the problem is not the lack of rate hikes this year but more with the path starting too late in the first place. The FOMC waited until the data near enough satisfied its dual mandate before executing the first rate hike after the recession. It may have been more desirable to put less focus on this mandate when making their decisions, or indeed adjust its parameters. The problem of hiking now is that US economic conditions suggest the economy is veering towards a slowdown.  Liquidity has considerably dried up over the past 12 months; nominal GDP has also been in a downward trend since 2015. An ill-advised rate hike within the medium term may be the catalyst that pushes the US economy into recession.