Fed rate rise anxiety has returned

The potential rise in US interest rates worried capital markets for most of last year and was the starting point to the Jan-Feb 2016 stock market fall. There was concern that the US central bank, the Federal Reserve Open Markets Committee, would raise interest rates before the economy in the US and globally was ready for it.

The Fed finally decided to raise rates in mid-December 2015 and markets plunged from the beginning of January on the first sign of economic weakness in the US. In the end markets accepted that the US economy is not imminently descending into a recession (quite the opposite judging by last week’s strong retail sales numbers) and the Fed signalled that they would wait a bit longer with the next rate rise. Stock markets bounced back, the oil price recovered and markets somehow came to believe that the next rate rise would be in quarter 4 2016.

Well, over the past week rate rise anxiety returned as the publication of the latest meeting minutes of the Fed’s rate setting committee revealed that markets had over interpreted the Fed’s hesitation in March and that a rate rise before the summer recess is well on the cards.  Predictably markets disliked this change of expectations and sold off by 1-2%. By Friday’s market close, the fall had been recovered and so the jury is out for the moment on whether the markets have become a little more resilient since the hurdle of the first rate rise was taken last year and the ensuing market correction proved unjustified.

It seems that the flow of macro-economic data that currently points to a strengthening of consumer demand and stabilisation of oil and commodity related industrial activity was powerful enough to persuade the market that perhaps the Fed is right to push ahead with the next rate rise. However, two of the three reasons why the markets have recently recovered, namely the weakening US$ and the strengthening oil price could move further. Oil has been touching US$50pb, up more than 80% since its January lows without a discernible change to the supply glut which sent the price reeling in the first place. The US$ has recently regained some of its so beneficial weakness and is up 4% since its lows a few weeks ago.

The prospect of a rate rise before the UK’s EU referendum and the US presidential election in the autumn together with the implications of oil and the US$ will therefore add additional anxiety to a very sensitive market.

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