And then there were nine
Pressure within the Federal Reserve system for an increase in interest rates is growing. The directors of 9 out of 12 Federal Reserve Banks are now pushing for tighter policy.
In a previous post, I highlighted a crucial leading indicator of interest rate changes: the pressure within the Federal Reserve, as represented by the number of regional banks submitting a request for the discount rate to be increased.
At the time of that post, 8 out of 12 districts favoured a tightening in monetary conditions and futures markets implied a probability of a rate hike by year-end of just below 60%.
A week ago the Federal Reserve Bank of Atlanta joined the fray (leaving only Minneapolis, New York and Chicago on the sidelines), but the markets are still not completely convinced. The market-implied probability of a rate hike has increased to just below 70%.
The growing clamour within the Federal Reserve system for an increase in interest rates could be silenced by a victory for Donald Trump today (8 November). However, on balance, we believe investors should be braced for an increase in US interest rates by year-end.
Tiptoeing away from ultra-low interest rates does not mean a complete reversal of easy monetary policy. Janet Yellen made clear on 14 October that she is looking to maintain easy monetary policy in order to run a “high pressure economy”. However, given the US dollar’s status as the global reserve currency, any increase in US interest rates has potentially far-reaching implications across global financial markets.
For example, we are already seeing the US dollar start to appreciate on a trade-weighted basis. Should that trend continue, we are likely to see renewed pressure on vulnerable emerging markets corporates with excessive debt burdens.