The USA labour market recovery remains on track with a solid report indicating 173,000 new jobs and a 5.1 per cent unemployment rate in August, as job openings rose to 5.75 million, the highest level in at least 14 years.
The AFP had reported that European stock markets fell Friday, with investors mostly wary ahead of next week’s USA interest rate decision and oil company shares sliding on a forecast for crude prices to halve yet again.
And if that happens, people may lose confidence in the Fed’s ability to manage price increases, which could lead to an upward spiral in inflation rates.
Fed officials in recent weeks, while giving a nod to global events including the equity rout that followed China’s August 11 currency devaluation, haven’t been willing to rule out a September hike. He cited several key variables, including lower energy prices, a stronger greenback, and reduced optimism with regards to emerging market <strong>growthstrong>.
The possibility that the US Federal Reserve could this week raise interest rates for the first time in more than nine years has injected new levels of anxiety in the global economy.
“I would be more concerned if they did not raise rates, because that would be a sign of maybe slowing economic activity”, said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.
On the negative side last week, the BoE trimmed their forecast for third-quarter growth to 0.6% from 0.7%. He pointed to the heavy debt burdens of developing economies like China that could weigh down growth. An increase in interest rates will also further strengthen the dollar, which has already appreciated.
Financial markets and investors face a testing time this week with June quarter current account and economic growth figures due out on Wednesday and Thursday respectively, and more significantly, the United States Federal Reserve’s two-day policy meeting.
“What’s keeping the Fed from lifting rates is not the USA economy, which is actually doing quite well”, said Bernard Baumohl, chief global economist at Economic Outlook Group LLC.
Tightening at this point “would be a serious policy error”, he said. “It’s better for the USA to make a decision, because what makes the financial markets volatile is the uncertainty”.
Fed chair Janet Yellen, answering a question. It has been looking increasingly likely in recent months. He predicted a September liftoff in last month’s survey but now thinks the Fed will wait until December.
World Bank chief economist Kaushik Basu, for example, echoed the IMF’s call for the Fed to stay its hand, telling the Financial Times that a rate hike now would cause “panic and turmoil” in the emerging markets. “These developments will likely keep the Fed very cautious next week”. There’s a risk that bond traders are underestimating the pace of rate increases, which could complicate the tightening process by jarring the market.
Wheeler is a little more optimistic than the market about the chances of a rate hike by the US Federal Reserve Bank.
So if the interest rate finally does increase, it would still be too low to affect corporate profits in the way it did back when a raise from 7 percent to 8 percent represented a big hit to the bottom line.
What is more important is how rapidly the Fed will continue raising rates, he said.