What to expect on from the Fed on Wednesday evening

Wednesday evening will see the end of the penultimate meeting, in 2015, of the Federal Reserve Open Markets Committee or FOMC. The body responsible for setting US interest rates and implementing Monetary Policy in America.

The world will be watching the outcome as the committee's decision will have potentially far reaching effects for both the US and global economies and the wider markets.

Despite many FOMC committee members talking extensively about the need for and even the likelihood of a rate rise (or two) within 2015, the FOMC choose to keep rates on hold at its September meeting.

As readers may recall US interest rates have not risen for almost a decade. The US central bank decided to maintain the status quo in September because of its concerns over the health of the Global economy rather, than the domestic one.

Little or no improvement since September

From where I stand it's hard to identify any improvement in either, since the September meeting. In fact given the recent easing in China and the strong suggestion of further measures from the ECB ,to come at its December meeting, the outlook has if anything darkened somewhat.

Citigroup have written again this week on the prospects for the global economy. In their research note they highlight the fact that "true" global growth has been running at around 2.25% in 2015 and will be at 2.50% in 2016, well below the long term norm of 3.00%.

Citi strategists expect the Bank of Japan to take action at one of its meetings between now and January 2016. They say there is a 40% chance of further stimulus at the October 30th gathering. We have long felt that the BOJ October meeting would be "d day" as regards further Japanese QE / stimulus .Though we have reservations about what this might able to achieve if anything.

How will the Fed react?

Against this background what are the prospects for US rate rise on Wednesday?

If the Fed were to concern itself only with the US economy and focus solely on Unemployment and Core Inflation levels then one could make a strong case for saying that they should raise rates.

In fact some commentators have argued that regardless of the underlying economy the Fed should raise rates to show that it can and to reflect the de facto tightening in other areas of the US money markets.

However the Fed does not wish to repeat the mistakes of the past. In the late 1930s when in the aftermath of a global recession, it raised rates, only to find that action was premature. The Fed was forced to back track. Subsequent rate cuts however did little to stimulate the economy.

Monetary policy can of course be divergent as individual economies recover at different rates and a can occupy different positions in the economic cycle. But the fact that China continues to ease and that the ECB will almost certainly add to its QE program by year end, with the Japanese seen as highly likely to follow suit (or indeed move first) must weigh on the FOMC members minds.

What the market thinks

Our stance on US interest rates in 2015 has been "lower for longer" as we have been unconvinced by the overall look and feel of US economic data and we do not expect the Fed to move on Wednesday evening, though of course there is always room for a surprise .

Readers may find it instructive to look at what the markets think the probabilities of a 2015 rate rise are, according the Fed Funds Futures (Fed Funds are effectively the interest rates and which banks can borrow from the central bank)

The Chicago Mercantile Exchange or CME compiles this data and calculates the implied probability or chance of a rate rise, in a given month, in which FOMC meets. We have plotted that data in the chart below (as of the close 26-10-15)

As we can clearly see from the chart the market gives very little credence to the idea of an October rate rise and just a 35% chance to a move in December 2015. In fact we need to look to March 2016 before the balance of probabilities swings in favour of rate rise and its almost certain to have happened by September next year according to the CME data .

So we could be in for a long wait.

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