Will a delay mean we have to go through this again?

August 24, 2015 03:34 PM

In the upcoming October issue of Modern Trader, numerous analysts discuss their thoughts on a September rate increase by the Federal Reserve. The prevailing wisdom was that the Fed would finally pull the trigger at the upcoming September FOMC meeting, but there were several outliers who though the Fed would wait.

Given market action over the last few days, there are plenty of market analysts who say the Fed will now be forced to hold off on tightening, perhaps even out until 2016. While there is some logic to this, the Fed’s mandate does not mention anything about reacting to the market (though there are many who would argue the Fed has been propping up the market for years).

Looking at this differently, one could argue that the current market purge began during the middle of last week when several positive housing numbers were released. At the time many analysts assumed that the positive news locked in a September rate increase and what followed is the expected market reaction to the inevitable.

In the meantime the Chinese currency devaluation and its stock market’s failure to respond to it added fuel to the fire and what should have been a simple protest sell-off turned into much more. Regardless of the exact causes, the impending rate increase did not help the market, but if the market was destined to fall in the face of the inevitable beginning of the tightening cycle, why would the Fed choose to go through it twice? Is the market going react any differently when faced with an impending rate increase in December or next March? Probably not, though one would not expect another 1,000-point overnight move in the Dow.

In order to delay a rate increase, the Fed will need to show a material change in its inflation or jobs outlook. When the Fed appeared to push the launch of tapering in 2013 from the expecting September date, it did so in the face of two weak employment reports and a Congressional threat to cause a technical default by not raising the debt ceiling. Two pretty good reasons to delay tapering. It is hard to get foreign governments to step up and buy more of your debt to replace the Fed’s QE3 bond purchases when the legislative branch is threatening to default.

A delay at this point, however, would appear to be a direct response to the market and not necessarily a reaction to employment or inflation data. There are more than three weeks before the September FOMC meeting, and  a lot of economic reports will be released in that time, including the August employment report, so there may be some justification for a delay, but why would the Fed choose to keep this decision hanging over them?

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.