The Decision to Hike Rates Itself Wrought With Volatility

The Federal Reserve’s stance on whether or not to hike interest rates in 2015 appears as volatile as global stock markets lately. Speaking to reporters last week, Fed vice chairman William Dudley said the decision to hike rates in September “seems less compelling to me than it did several weeks ago. But normalization could become more compelling by the time of the meeting.” Paradoxically, Dudley went on to say recent market volatility contributed to his hesitation, while later explaining “short-term volatility doesn’t have much implication” for policy makers’ decisions. Goldman Sachs reviewed the literature concerning previous policy decisions in response to market volatility and concluded, all else equal, following significant market gyrations, the Federal Funds Rate tends to be 15 basis points lower than otherwise. While the recent price action would point to the Fed delaying rate increases, other Fed Governors expressed their support for hiking over the weekend at the annual Jackson Hole Economic Forum. The Fed most likely expected some volatility as the first rate increase drew near after years of unprecedented monetary stimulus, making it unlikely that recent market moves would directly lead to a pause in their plans. What could lead to a delay in rate increases is consistently subdued economic data. While some data points are improving, the one metric we’ve written so much about, inflation, continues to be weak. On Friday, the Core PCE Deflator fell to 1.2% year-over-year. We still have a long way to go to reach the Fed’s 2% target.          

Sources: Bloomberg, WSJ, GS, SNWAM Research