Tuesday 17 July 2018

So what's up with the Fed after all the talk of hiking US rates?

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Colm Kelpie

Colm Kelpie

There's been considerable volatility in global markets in recent weeks. So what's going on?

Stocks around the world fell again yesterday amid global growth concerns as the timing of a US interest rate increase and the slowdown in China made investors jittery. And you're right, they've been jittery for some weeks now.

The slowing of the Chinese economy has been a central feature, particularly after repeated devaluations of the yuan within the last week to 10 days. The world's second biggest economy is officially targeted to grow at 7pc this year, but some economists believe it is expanding at a slower pace. And that's rattling markets amid concerns that the slowdown will limit global growth.

So where does a hike in US interest rates fit into all of this situation?

Analysts have been expecting a US interest rate hike for some time now, which will be a significant economic announcement as it will be the first time in nine years. It essentially will be a vote of confidence in the US recovery. Markets have been keenly watching for any hints from the Fed about the timing of such a move.

When will it happen?

There have been mounting expectations that it could happen as soon as next month. The recovery in the US is pressing ahead, with the Fed itself recently pointing out that the economy and job market continue to strengthen. Fed officials said they felt the economy had overcome a first-quarter slowdown and was "expanding moderately" despite a downturn in the energy sector and headwinds from overseas.

But minutes released on Wednesday from the Fed's July meeting led analysts to pour cold water on the prospects of a rise next month. The minutes showed officials in broad agreement that the US economy was nearing the point where rates should move higher. But they also noted lagging inflation and a weak global economy posed too big a risk to commit to a rates "lift off".

l So they won't be hiking rates in September?

The short answer is, who knows? If only we had a crystal ball. There are too many factors at play that could derail those prospects, such as mounting concern over that Chinese slowdown.

Isn't the UK having a similar debate at the minute?

Yes, but a hike from the Bank of England is not expected until the first quarter of next year.

What would the impact be on Ireland if rate hikes occurred in both countries?

In both cases, it is likely that it would push up the respective currencies. The US dollar would get stronger, as would sterling. That would be good for both Irish exporters into those markets, as well as for the tourism market here as it would be cheaper to sell goods into those markets.

However, conversely, that holiday to New York, if the value of sterling pushes stronger, will become more expensive as you'll get fewer dollars for your euro.

Similarly a trip to London, or even across the border to Belfast, will be pricier on the back of stronger sterling.

Irish Independent

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