Last week it was announced that it looks very likely that the month of September will determine the price of the Fed and the European Central Bank (ECB). However, should US inflation continue to fall, we have to keep in mind that the Fed will not raise interest rates 4 times.
It would not be surprising if interest rates in the United States are not increased again this year. This is despite the fact that the financial markets still estimate the chance of an interest rate increase in December at 50%. In that case, there are also consequences for the ECB's actions.
The ECB does not want to tighten its monetary wings, while the Fed does exactly that. As a result, for example, the euro could become stronger, with all its consequences for the economic recovery in the euro country and inflation. A stronger euro tends to slow economic growth and reduce inflation.
Besides the inflation figures, there are two more things we need to keep an eye on, as these could also influence the path the Fed takes. And indirectly, that will also be the path of the ECB.
Jackson Hole
First of all, there is the annual conference in Jackson Hole, America, where both Janet Yellen (Fed Chairman) and Mario Draghi (ECB Chairman) will speak. Experience shows that they can make statements there that can cause quite a stir on the markets. These statements can also provide more clarity about the monetary policy to be followed for the medium term. For example, both the Fed and the ECB previously announced that they would be purchasing government bonds on a large scale.
A second matter that could play an important role is the fact that the American government will run out of money on September 29. The US Parliament determines the maximum amount the US government may borrow. Once Washington reaches that debt ceiling, and Parliament does not raise the ceiling, the US government will not be able to pay wages or repay interest on old debts.
The first means that civil servants are sent home, the so-called government shutdown. That is something that has happened before in recent years, because Republicans and Democrats could not agree on raising the ceiling in time. The second implies that the United States would be bankrupt. Washington has barely managed to prevent this in recent years.
Debt ceiling
Washington is expected to reach that debt ceiling on September 29. If parliament does not raise the ceiling before then, there will be tension on the markets. After all, investors should keep in mind that the United States could, technically, go bankrupt.
Ultimately, the ceiling will be increased, but given the tensions in Washington (between parliament and Donald Trump, between Republicans and Democrats and between Republicans themselves), it would not be surprising if this increase does not take place on time again. In the worst case, these tensions could also thwart the Fed's plans. Such an uncertain environment is not an environment in which the Fed will raise rates.