Fed Preview: Getting Closer to Raising Rates?

The Federal Reserve Board of Governors meets this week to set monetary policy, and will provide a statement to the market on how the committee views current and future economic and financial conditions.  While this meeting is “live,” meaning that the Fed could raise interest rates, it is highly unlikely they will do so. Most of the market’s focus is on the September meeting, which will feature a post-meeting press conference and an updated statement of economic projections.  The jury is still out on whether or not the first rate hike will come then.  Our take has been and continues to be that inflation is not strong enough to warrant a rate increase.  In addition, the extraordinary easy money policies in place at most central banks around the world has pressured the dollar upwards, which makes our export markets less attractive to foreign buyers, hurting growth.  The number of global easing measures by central banks in 2015 stands at 52 after the Bank of Canada lowered rates two weeks ago.  These easing measures have stoked what some are calling “currency wars,” where economies are deliberately holding down the value of their currency to promote growth via exports.  If the Fed decides to raise rates in September, the committee will be doing so knowing full well that the U.S. will lose these currency wars, which we believe will be a tough pill for the Fed to swallow. 

U.S. Dollar Index

Source: Bloomberg, RBS