Fed hikes on hold as FOMC knows better

18 September, AtoZForex.com, Lagos – Giving an holistic view to the possibility lurking around the raising of interest rates by the Federal Reserve, history is definitely going to be an influential factor that will stall the progress in pursuing a hike in rate leading to the Fed hikes on hold.

Wall street experts survey results reckoned that the Federal open market committee will vote in favor of an increased rate, a first of its kind in more than 9 years, although, future traders strongly oppose the survey. There is an apparent mutual belief by by Economists and Strategists alike, that the Fed will hike interest rate this week, but future traders have an entirely different view.

According to Morgan Stanley analysts, indications suggest about 30 percent probability of a rate hike and that “overstates the chance” of a hike in rate. On the contrary, CMF Fedwatch tools puts it at 21 percent probability as against its earlier 23 percent a day before and 45 percent a month ago respectively.

Bigger focus on 1999

A bigger focus should be on 1999 and 2004 where the central bank anticipated a market expectation of a little higher than 50 percent before taking a move, and it eventually became complicated after all.

“The 1994 hike cycle was one in which the Fed did not sufficiently manage market expectations prior to liftoff,” Dhingra and Hornbach wrote, “This resulted in a February 1994 rate hike that was followed by high levels of market volatility and a significant tightening in financial conditions”.

Data dependent course

Going down memory lane, in 1999 the Fed hit parity by following an unpredictable path. Ditto for 2014, when the FOMC followed a path even more closely aligned with futures expectations. According to Morgan Stanley’s observation via following the Chicago Fed’s financial condition index, 1994 was noted for a sharp tightening, while 1999 had a relaxed conditions and 2004 hike “barely tightened at all”.

Janet Yellen, the Fed chair reiterated that the central bank would go by a “data dependent” course, meaning both economic data and financial conditions would be due for tightening. Fed remains vulnerable if it doesn’t pay cognizance to history and unleashing a September rate hike may not be the best for now.

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