The US Federal Reserve, the Fed, is due to raise interest rates on Wednesday evening for the first time since 2006. If it doesn’t move, it will be a huge surprise. Assuming US rates rise as expected, here are six things to watch.
1. At the moment the Fed has set a target of between 0 and 0.25 per cent for what is called the Fed funds rates. It is expected to increase this target to between 0.25 and 0.5 per cent. Any deviation from this would be a surprise - a big one. Also watch comments from Fed chair Janet Yellen at her press conference after the announcement, where markets will look for any indication of the pace of interest rate increase which the Fed expects for 2016. The expectation is a slow pace - the market fear is that even this may be too much, given the relatively modest pace of growth.
2. The technicalities of increasing the rate are not straightforward - as the Fed is setting a target for a type of trading between banks and other financial institutions who hold Fed deposits. Tweaking a couple of its official interest rates for operations in the market should achieve the desired result, but rates have been so low for so long that there are some dangers here of what is being called a "bumpy take-off" in the actual manoeuvre of increasing rates.
3. The US stockmarket is typically the first place to look for market reaction. US share prices were stronger on Monday and logic would suggest that a 0.25 per cent rise is " priced in"- in other words investors have been long expecting it. However markets are nervous and there are other factors playing in here, too - including the oil price, fears about China, wider growth concerns and relatively high share valuations. Any fears about a slowdown in growth heading into 2016 would be particularly damaging to shares.
4. The US dollar is also worth watching in the days ahead. It has been generally stronger this year, particularly against a weakening euro. Higher interest rates should support the currency by increasing the attraction of holding dollar assets. However here again there is a possibility that the change is already " priced in". The dollar has actually weakened at the start of some earlier rate rise cycles. The ECB will hope for US dollar strength as this will boost euro zone exports and push up inflation.
5. Signs of stress in the bond markets are another key indicator. The US government bond market has been pretty calm, but yields of so-called junk bonds - higher interest rate bonds sold by companies - have gone higher, and some bond funds, who manage investments by clients in these assets, are in trouble. This is because investors fear companies are too heavily borrowed and may struggle to meet repayments. The threat of higher interest rates may put a focus on these fears. So far European bond markets have been calm - supported by low interest rates and ECB bond buying.
6. The interest rate rise will focus attention on emerging markets - everywhere from Brazil to Malaysia to Russia, India and so on. It has been a terrible year for emerging markets, mainly because many are oil or commodity exporters and prices have tumbled. Higher US interest rates can hit emerging markets by making it more attractive for US funds to keep money at home - emerging markets benefited from major inflows from investors looking for a decent return in recent years, but flows have already started to reverse. Higher US interest rates can also make it more difficult for holders of dollar denominated debt - including many exchequers and businesses - particularly if it pushes the dollar higher. Already many emerging markets have had to push up interest rates or wade into the market spending foreign reserves to try to support falling currencies. The risk is higher US rates increase these pressures.
