It's not THE big day for the Fed tomorrow, but it will certainly get the market's attention

Tuesday 28th July 2015

It's not THE big day for the Fed tomorrow, but it will certainly get the market's attention

 "Fed and BoE signal rises in rates amid muddled data" , The Financial Times, P.6

Look out tomorrow for the US Federal Reserve's decision on interest rates. Nobody expects a rate rise to be announced tomorrow, but all will be watching for clues as to the timing of a rise in the language used at the Fed's announcement. September remains the favoured date amongst most pundits, with some holding out for December and one or two still suggest that the Fed might wait until early next year. That particular scenario is now a long shot but would go down very well with the IMF, who with the global ramifications of a rate rise in the world's largest economy as their prime concern have been urging restraint.

It's worth reminding ourselves of some of the main factors that will go into the Fed's decision-making process. Hawks argue that the data on US growth , whilst mixed, demands some action by the Fed sooner rather than later. In particular falling unemployment and a long-awaited pick-up in wage pressures point to inflationary pressures in the future. Moreover, they point out that since the stubbornly low inflation numbers are calculated on an annualised basis, comparing prices with those of one year ago, they offer a false impression of the real state of affairs. In other words, once the precipitous fall in the price of oil in the latter part of 2014 is taken out of the equation, the numbers will look very different.

The main counter-arguments to a rate rise centre on two areas : Firstly there's the global impact of a rate rise that the IMF is so worried about. It's hardly ideal that the US should have to raise rates at a time when Greece is still a basket-case (make no mistake, Grexit is still very much on the cards) and China's stock markets are in free-fall. And what about the effect on emerging nations who carry such high levels of US dollar-denominated debt ? Many of these nations are already under the cosh from the rout in commodity prices (which of course is itself a dampener on inflation).

The Fed will also consider the negative impact of a likely stronger US dollar  --  not just on foreign debtors but on US exports and therefore growth. A rise in rates at a time when most the world is cutting or at least maintaining super-low rates could be a pretty malign combination.

Every word uttered by Fed Chairwoman Yellen will be scrutinised tomorrow for pointers to Fed policy. No doubt some will read too much into what she says  --  the situation is still fluid, after all. But by the end of the day we can hope to have clearer idea of where things are headed.