US Federal Reserve would be wrong to raise rates, analyst says

The US Federal Reserve would be wrong to increase interest rates today given the risk of an overly strong US dollar and the ‘liquidity gaps’ which exist in the US Treasury market, according to a well-respected analyst.

Headline consumer price inflation at a four—year low Stateside would be exacerbated by an overly strong greenback. That deflationary impulse would be made worse by the depreciation in the Chinese yuan that already lies ahead “shadowing declines in US jobless rate”, said Ashraf Laidi.

Making matters worse – and of concern to rate-setters in Washington – the situation in China means it is less of a buyer of US Treasuries, thus contributing to so-called “liquidity gaps” in US government debt markets. Ditto for Saudi Arabia, an erstwhile US ally, which is already “suffering” from the triple whammy of plunging crude quotes, a rising public deficit and a currency tied to the fate of the US dollar.

“There are other reasons, but that should do it for now,” the veteran market watcher added.

To back up his arguments, and with the benefit of hindsight, he recounts the policy errors committed by the Bank of Japan first in August 2000 and then in the first quarter of 2007, when it tightened policy in reaction to domestic conditions but misjudged the international environment at the time, with developed markets entering into downturns soon after on both occasions.

“Raising rates now would be a grave error and the process of reversing it will trigger panic.”

His view was echoed by analysts at UBS, among others.

"US data have sent mixed signals, China risks have intensified and US financial conditions have unexpectedly tightened. Given market pricing, a decision to raise rates would be a surprise," the Swiss broker's Global Macro Strategy team said in a research report sent to clients on Thursday.

"Oil producing country surpluses funded the deficits of the advanced economies prior to the global financial crisis and the deficits of the non-oil emerging markets since the global financial crisis. Now, with oil prices having fallen, petro-dollars are funding neither. The IMF estimates the break-even oil price for most prominent oil exporters – i.e. the level at which the current account falls from surplus to deficit – lies above USD 60 a barrel," UBS said in another report issued on the same day.