© David Sloan
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I think the businesses are generally ready for such an increase, provided there is reassurance that the move will not be followed by a large number of similar ones in coming months. I believe 25 basis point rate increase is a fairly modest decision, and that is generally seen as inevitable sooner or later. Thus, such a move would not cause a major undermining of the economic system provided that the future moves would be fairly cautious.
Economists say a quarter-point increase would have a negligible impact, but it is a sensible first step to ensure the Fed stays ahead of inflation. Sceptics warn that inflation remains on the floor, and the Fed risks rolling world markets and pushing up the Dollar if it acts too soon. In your opinion, is the US economy in fact ready to cope with interest rate rises? Are you more optimistic or sceptic on the issue?
I believe the US economy is ready to take a modest increase, however, we are flexible on our view. In case the economic data deteriorates further than our expectations in Q4, then I think it may be prudent for the Fed to continue waiting. At the moment the signs of slowing employment growth are not alarming, given that it is still going above 100,000 per month.
That should eventually cause labor market tightening sufficient to feed through to wages and inflation. In fact, CPI data does show the core rate having picked up a little in the last year. That is not much, but the Fed does seem to have confidence that inflation will respond to the labor markets eventually, even if wage growth at the moment is very stable.
There is a question on how financial markets will react to the rate hike, since some fear that there may be a widespread panic among the investors, the one thing that the Fed is actively trying to avoid. What is your opinion in the matter?
In the case the Fed was to increase rates in October, that would have caught the market by surprise, and there would be quite a significant negative reaction in the short term.That negative reaction would probably be fairly brief given that the Fed would communicate over the future moves being quite gradual, dependent on data. In fact, there is no guarantee that it is going to take place at all, if the economy remains weak. Therefore, one rate hike may be all we will see in several months.
A lot depends on the communication that is seen at the time of any rates increase. I believe the most likely timing of a rate hike remains in December. If the economic data deteriorates heading into December, and the Fed goes ahead and increases rates, then it will not cause quite a lot of alarm. However, if the economic data tone stabilizes, I do not think the December rate increase will cause much anxiety at all.