Finally Something Goes the Right Way For the FED

Posted Thursday, October 6, 2016 by
Skerdian Meta • 2 min read

Most major central banks hold interest rates close to zero with some of them such as the BOJ (Bank of Japan), SNB (Swiss National Bank) and the ECB (European Central Bank) going into negative territory. But, no central bank in the world wants the interest rates so close to zero; they have no room to maneuver in case of an economic shock. This is the reason the FED, the BOE (Bank of England) and all other central banks wanted to start tightening the monetary policy and hike the rates for years now. 

The FED made it clear that a rate hike is coming soon, likely in December. But the US economic data for August which was published in September was been quite disappointing. It might be a seasonal thing due to the holiday season, but it was far from warranting a rate hike this year nonetheless.

It felt a bit strange to see Yellen give such a strong signal for a rate hike now that the data has worsened, when the FED have been dovish so long before, when the data strongly supported a rate hike. 

Yesterday though, something went their way for once. The ISM non-manufacturing PMI which takes into account all sectors of the US economy but services jumped from 51.4 to 57.1, which is a huge jump. The final services PMI also came out higher than the previous number. The factory orders were expected to decline by 0.4% but they increased by 0.2% month/month. 

That makes 3 for the hawks at the FED and 0 for the bears. This comes at such a crucial time after a streak of negative economic data from the US. This increases the odds for a rate hike in December even further. Finally, we are seeing some signs that the economy is falling in line with the FED actions. The first signs of economic recovery are appearing in Europe as well, but it is still to early to declare victory for the central bankers

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