Originally published by AxiTrader
- The US Fed raised the interest rate 9 times since Dec 2015, and it is currently standing at 2.5 basis point.
- In 2018 alone, it was hiked four times amidst strong criticism by the US president, Donald Trump, and triggered a market selloff.
- The US Dollar Index touched a low of 95.02 two weeks ago and it was the lowest level not seen since October 2018.
The main agenda of the US Federal Reserve is to maintain the US economy in a healthy phase by controlling the Fed Funds Rate. The Fed Funds Rate is literally an interest rate that banks charge each other for overnight loans to meet their reserve requirements.
It is a known fact that the Fed kept the interest rate at a very low level for a long time (2008- 2015) to fight off the gigantic deflation effects inherited from the blowout of 2008 financial crisis. The Fed had clearly achieved their goals as global markets had a prosperous 10-years-period. During those periods, the global economy led by the US, managed to recover fully and even rose higher.
Prior to deciding on their monetary policy, the Fed pays close attention to major economic indicators such as the Nation’s GDP and the unemployment rate. Their targeted growth for the US gross domestic product (GDP) is between 2% to 3% annually (See the above-attached picture), while the unemployment rate to remain subdued at 5% or less (see the below-attached picture).
In a nutshell, as far as the fed is concerned, the US economy is currently hitting the sweet spot. This directly reflects Powell’s speech during December 2018. It is likely that the fed is not in a hurry to raise the rate again.
Powell also understands the sheer danger of raising interest rapidly as the Fed did so in the early ‘80s by the then-Fed chairman, Paul Volcker. The inflation rose as high as 13.3% and the interest rate hit 20% in May 1980 and December 1980 respectively. Instead of curbing inflation, a rapid rise in interest rate can result in a runaway inflation. This is because, rate hikes can also affect other aspect of the economy, such as causing a plunge in business confidence and mortgage-related businesses.
This type of sudden change in monetary policy is known as a stop-go monetary policy, and we are expecting that Powell will not follow suit. Well, he shouldn’t.
At the same time, Powell is currently under strong criticism by Donald Trump, and Mr. Trump believes that the recent market turmoil in December 2018 was caused by the US Fed’s aggressive rate decisions.
Moreover, we have yet to see the potential negative effects created by the record government shut down which occurred in the late 2018 to Jan 2019.
Therefore, we believe that Powell will not raise the rate this week. If the rate stays steady, it should boost investor’s confidence further, and we can expect more risk-on movements such as a potential run up on Stock Markets (e.g., Dow Jones Index, S&P 500 Index) and the rise of yen pairs (e.g., USD/JPY).
