In 2016 FOMC members voted against raising interest rates on a number of occasions when the US economy was showing strong signs of life, but due to “global” risks made the decision to hold tight all the way through to December.
The previous December, in 2015 the FED’s Chairlady had USD bulls rubbing their hands with glee when Yellen dropped the bombshell promising 4 interest rate hikes in 2016.
At first it was China, early signs appeared to suggest that growth was drying up, then it was the abysmal non-farm payrolls followed by the Brexit vote in June. Then came the US Presidential elections in November which threw out yet another shock to the market.
So what makes 2017 any different? If anything, the scale of uncertainty has intensified since last year, potential threats have become threats, and the economic and political cracks are growing in size.
So why has, historically, a very dovish Yellen suddenly changed her mind on the longer term trajectories?
Let’s start with Trump, quite possibly one of the biggest unknowns the US economy has witnessed in decades. The colossal damage that could unfold if he continues to irritate foreign leaders should be ringing alarm bells. His meddling in Chinese-Taiwan affairs and his distaste for Chinese goods should be enough in itself to worry markets.
And just when the ruffling of feathers couldn’t get any worse, Trump signs an executive order to withdraw from TPP, a deal that would benefit trade between 13 countries.
I highly doubt that Janet Yellen skipped over these details, but in case there was any room for doubt, the EU President’s stark warning that Trump poses a huge risk to the Eurozone economy should clear things up.
Eurozone in crisis
The Eurozone doesn’t need the added concerns that Trump brings, with the Brexit to focus on alongside the elections in France, Germany and Holland, the Eurozone already faces a growing number of challenges throughout 2017.
We only need to cast our eyes back to 2007 to understand the global shock one country can bring, the collapse of the Lehman Brother’s sent shock waves through the markets and still to this day, many are still recovering from its impact.
I would be very weary of waiting on the FED to raise interest rates, far more critical events could unfold before then.