DID THE FED JUST DELAY ITS FIRST HIKE UNTIL 2016?


Anthony Gillham, manager, Old Mutual Voyager Strategic Bond Fund and Old Mutual Managed Fund, says Stanley Fischer has intensified the debate over when the Fed will raise interest rates

Investors continue to busy themselves with debating whether or not the US economy is strong enough to warrant the first hike in interest rates in nearly 10 years as soon as September or later in December. But Stanley Fischer, Vice Chairman of the US Federal Reserve, gave a strong hint yesterday that rates might even not go up at all this year. Speaking in a television interview, Fischer suggested that whilst inflation is being held lower by temporary factors such as falling oil prices, the Fed would be unwise to move before it had actually seen any sign of rising prices.

Given that the slump in oil prices over the past 12 months didn't halt until January, their stabilisation and impact on year-on-year inflation numbers won't be seen until the turn of the year. The fact that the sharpest declines didn't occur until the end of November, when the OPEC cartel declined to cut production, adds weight to the notion that a move in September is off the table – according to Fischer's logic. Meanwhile, limited liquidity around the Christmas holidays means a further delay until the new year might now seem more likely than not.

The very public debate amongst the Federal Open Market Committee members looks set to continue. Fischer's remarks come on the heels of comments by Dennis Lockhart, FOMC member and president of the Federal Reserve Bank of Atlanta, who indicated that the bar to raising rates in September is low. Fischer's words may carry greater weight because he is a permanent member of the FOMC (Lockhart only votes this year) and is seen as Fed Chair Janet Yellen’s "number two.”

Yellen herself has been widely quoted on the "optimal control" approach to monetary policy, under which conditions of elevated unemployment would suggest leaving interest rates lower for longer – even if that meant inflation running above target. Yet as US unemployment continues to normalise and with equal weight placed by the FOMC on this measure alongside inflation, it is little wonder that bond markets continue to seesaw between pricing in hikes sooner or very much later.