The New Zealand dollar was little changed from the New York close on Friday ahead of local data that may show the economy accelerated in the second quarter and before a key meeting of the US Federal Reserve that has an outside chance of delivering an interest rate hike.
The hype over Fed rates also reflects uncertainties about global growth and, in particular, the slowing Chinese economy.
The Fed may raise rates by a tiny amount next week, and slightly further at its meetings next month and in December.
At the beginning of 2015, most economists thought the Fed would raise rates by midyear. By comparison, futures markets-where traders make bets on the Fed policy outlook- signal only a 24% chance of the Fed raising rates this month, CME Group said Thursday.
“We don’t think it will detract from the possibility that the Fed is considering a September rate hike, only if we saw ominous signs of a deterioration elsewhere in the data”, said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.
“If the Fed tightens, it will be due to the fact that they have a perception that inflation is drifting up, but more importantly, that unemployment is falling and the economy is recovering”, he said. But predictions for next year remain muted, with the consensus coming in at 2.6%, down from 2.7% in the August survey. And more than one-third said despite financial-market fluctuations, the impact on the real economy would be minimal. In contrast, another unanimous vote to retain the current policy paired with more of the same language from the July 29 rate decision may highlight the risk for a further delay of the normalization cycle as the central bank pays increased attention to the downside risks surrounding the global economy.
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.
The main reason has been the drop in the prices of oil and other commodities, rather than weak U.S. growth. Forecasts for growth next year covered a wide range, from as low as 2% to above 7%.
“The world economy is looking so troubled that if the US goes in for a very quick move in the middle of this, I feel it is going to affect countries quite badly”, Basu said.
Yet, future odds are 24% that the hike will be instituted as emerging markets especially China, struggle and inflation remains benign with some notable watchers, such as Larry Summers the former Secretary of the Treasury arguing against an interest rate hike.
Whether or not the Fed acts to normalise monetary policy this week, one thing that everyone can agree on is that any rise in interest rates will be done gradually. Peruvian central bank governor Julio Velarde agreed, saying during a recent visit to Seoul that most emerging markets want the Fed to raise rates “as soon as possible”.
Arguably, a rate hike would actually hit Brazil the hardest.
And, of course, rising interest rates will impact the profit margins of United States companies and thus their valuations, and cause a fall in their stock prices.