By the time you read this, we will know the US Federal Reserve’s actions at the Federal Open Market Committee (FOMC) meeting on 17th September. If it does decide to raise rates, this will be the first time in nine years. Last month, polls had this outcome as 50:50 and now this has fallen to only a 28% probability, most likely in the face of the recent worries about China and the sharp selloff in global equity markets last month. It seems that while there are many compelling reasons to say rates should go up, the Fed is maybe mindful of the possible knock-on effects that this may have on the wider global audience.
A good example of this would be the impact on emerging markets, in particular Latin America, where economies levered themselves significantly during the past excess liquidity and zero-rate environment. However, we do not suggest that the Fed will sit still for long in order to prevent collateral damage elsewhere.
One possible outcome maybe a rate rise of 0.25% accompanied by chair Janet Yellen calming the markets by saying ‘this is it’ for the time being and that the Fed will keep a watching brief to see how markets digest this initial move. This may have the desired effect for the debt markets and have just enough of a reassuring influence not to materially impact medium and longer term interest rates.
In regard to UK rates, we still maintain that we will follow the US lead after a suitable length of time, which we still expect to be circa the first quarter of 2016.
On a slightly different subject, we could not let this article pass without noting that Jeremy Corbyn has managed to pull off a coup, sweeping to power as the new Labour leader. His first few days in office have been tainted with significant confrontation and hostility, with a number of angry Labour MPs reportedly warning their new leader that he only has their loyalty if he does not cross a number of ‘red lines’.
It seems these range from the Trident nuclear deterrent, pulling out of Nato, leaving the EU and abolishing the armed services, to name but a few! Corbyn also does not believe in the PFI model and suggests that the government buys back all the current schemes. That might be an interesting conundrum for the new shadow chancellor, John McDonnell.