Fed: Yellen has a little choice, no interest rate hike would mean sending a negative signal

Investors are holding their breath ahead of the Fed’s decision taking place tomorrow. Fed chair Janet Yellen will deliver her verdict on the trajectory of US monetary policy after this Wednesday’s meeting. In recent statements, notably when she addressed the Economic Club of Washington at the beginning of December, she has expressed confidence in the US economic recovery, an essential condition for the interest rate hike that seems to be taking shape. Along with a number of Fed committee members, she has adopted a clearly hawkish tone in recent weeks so as to prepare investors for what should be a gradual tightening of monetary policy. Together, they regularly cite the number of job creations -to remind investors that the labour market is performing well- and stress upbeat consumption data. They also believe that turmoil in emerging markets will not thwart the recovery cycle.

Janet Yellen has little choice but to move onto the offensive this month; staying put would mean sending a negative signal on the state of the US economy. In the opinion of Edmond de Rothschild, the first US rate rise in 9 years is expected to be limited to 0.25%. Subsequently, the Fed could opt for fresh but modest hikes in 2016 -in line with key data like inflation and the US dollar- and take rates to 1% by the end of next year.

Ultimately, the real question is to what extent the Fed will want to provide forward guidance. So far it has not done so: the dots on its so-called “dot plot” are too far apart to be a reliable guide. Will the Fed simply say that future rises will depend on the economic situation? That would mean depriving markets of any bearings. What features, beyond a change in its “dots”, will the bank use to convey the message that an interest rate rise will initially be limited? The first indications will be of vital importance for investors.

"US-eurozone monetary policy divergence – says Edmond de Rothschild – will gradually increase in coming months, a trend that will undoubtedly make old Europe -and European equities in particular more attractive. Eurozone cyclicals with strong domestic exposure are the most likely to perform well".