Top Stories
Top Stories
Central Banks

Here’s why markets are fascinated about a Fed rate hike

Fed won’t hike more than once in 2016: EI Sturdza

Markets across the globe have become obsessed about the next move from the U.S. Federal Reserve. Asset classes have been turning in an instant on the smallest of speculations about the U.S. economy or comments from members of the Federal Reserve.

But this fascination with the Fed has been growing in the past few years with global markets paying a lot of attention to U.S. economic data such as jobs reports and analyzing statements made by the Federal Reserve chair Janet Yellen. So will this obsession ever end?

"The obsession is not so much with one rate hike per se but about second-guessing how other investors and markets would react," Alastair Winter, chief economist at Daniel Stewart told CNBC via email.

"If the FOMC hiked this month, which I doubt, and said that's all for another nine-12 months, which I doubt even more, nobody would care very much. However, because FOMC members are talking all the time about more than one hike and 'a return to normality' the investors do have to think that through: a sort of worst case analysis of a market funk."

Are central banks credible?

Winter also explained that all the "flashing hot and cold" by FOMC members has also made investors rather cynical about any new hints in speeches.

"I personally do not think there is a need for the Fed to hike now and I suspect most members of the FOMC think that too but they clearly feel they ought to chatter about it incessantly. This adds to the unease amongst investors."

Meanwhile, another analyst told CNBC that the Fed needs to hike rates because their toolbox is empty. Eric Vanraes, portfolio manager at EI Sturdza Investment Funds thinks the Fed could hike as soon as September, but that it's unlikely to raise rates more than once before the end of the year.

"The credibility of central banks is essential. It is the problem of the Fed that they had to stop this rate policy and the door was open at the end of the year 2014 and they did not do anything. Today I am afraid it is a bit too late. The problem of the Fed is that they need to raise rates, not because the economy is doing well but because the toolbox is empty."

Janet Yellen
Xinhua | Bao Dandan | Getty Images

But as well as the will-they-won't-they speculation, markets seem to be obsessed with the timing of this hike. Emerging markets have been cautious as a Fed rate hike could mean a stronger dollar which, in turn, could weaken their currencies – a repeat of the events that unfolded after the Fed decided to roll back its bond-buying program in December 2013.

Ever since the Fed raised interest rates for the first time in December 2015, financial markets have been riding on the wave of optimism that there are more hikes to come. Goldman Sachs recently said in a research note that a September rate hike remains on the table even with a disappointing jobs report.

The bank last week put 55 percent odds for a hike at the Fed's Sept. 20-21 meeting and 80 percent odds by the December meeting. The firm said the soft jobs report makes it a "close call" for September.

"The obsession with a Fed rate hike has developed over the last couple of years, starting with the central bank wanting to begin the tightening process at a time that many in the markets believed was wrong, to now being in a position when its credibility is constantly being called into question," Craig Erlam, senior market analyst at Oanda told CNBC via email.

Erlam further explained that we are now in a scenario where markets no longer reflect the message that the Fed is trying to put across, making the job of raising rates with minimal market disruption a very difficult one.

Follow CNBC International on Twitter and Facebook.