For the past six months, many online trading specialists such as those affiliated with CMC Markets have been speculating on a potential interest rate hike by the United States Federal Reserve. Although some were calling for such an increase as early as November, it is no surprise that the tumultuous election results have delayed this action. Now, it appears all but certain that Janet Yellen will announce this hike during the upcoming 14 December meeting. Why are analysts confident in such an outcome and what will this (potentially) signify for the electronic trading community as a whole?
Inflationary Data
From a purely technical point of view, the United States job market has seen significant improvements throughout the 2016 financial year even if recent figures may indicate a bit of a short-term slump. Perhaps more importantly, Mrs. Yellen pointed out that inflation has started to pick up pace (1). These tend to be the two historical conditions which indicate that a rate hike is not far off. Unless some drastic economic data emerges during the next three weeks, it is perfectly reasonable to assume that this action will go forward as planned.
An Independence Issue?
While the technical factors behind such a move are clear, astute online traders need to appreciate some other causes which may not be as explicitly stated. It is no secret that soon-to-be-president Donald Trump has been a sharp critic of the big banks. This has no doubt fed into the increased likelihood of such a hike. Mrs. Yellen rightfully pointed out that politics and banking do not necessarily mix and that countries which saw an intertwining of the two had experienced “terrible” consequences in the past.
The main concern is that Trump will try to reign in the power of such institutions. Although this may be unprecedented in recent years, the fact that he has already sharply criticised Mrs. Yellen for her handling of the economy could signal that troubling times lay ahead for larger financial institutions. So, an interest rate hike on 14 December might also be interpreted as a move to bolster the economy and strengthen the argument that the government should not overtly meddle in financial policies.
A Dangerous Example?
There have always been concerns that a Trump victory could free up paths for other conservatives in the United Kingdom to gain ground. When Ed Balls (former Shadow Chancellor) recently called for the independence of the Bank of England to be curbed to address what he called “growing discontent” (2), we have to wonder if an interest rate hike within the United Kingdom is not far off. However, the one solid argument against any such move is that the government will not want to “rock the boat” after the recent referendum.
Online Trading Implications
It seems a rather safe bet at this point to assume that a rate hike initiated by the United States Federal Reserve is indeed in order. So, what does this mean for the average online trader? In order to appreciate the implications, it is important to look beyond the immediate impacts of the hike itself.
Although there is no doubt that this move makes a great deal of sense from the point of view of the domestic economy, it is just as critical to realise that a hike is likely meant to (partially) quell jittery market nerves between 14 December and when Trump is officially sworn into office. There are many who have already grown sceptical in regards to the officials being appointed to senior posts within his new cabinet. Perhaps more worryingly is that as of yet, he has still not outlined how he plans to tackle the domestic economy. These actions (and inactions) have investors worried. So, a rate hike could represent at least a temporary means to allay such concerns.
We should therefore look for a short-term rally on the dollar immediately after the announcement of the rate hike before its value somewhat levels off during the holiday season. As for what will occur once Donald Trump is sworn into office, it appears as if we are truly entering into uncharted territory.