Many economists think that the Fed should (and will) raise rates.
At its July meeting, the Fed kept interest rates unchanged, but the key passage on the Fed's future plans read (emphasis added): "The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term."
It is finally time for higher rates?
Lemme flip my (fair) coin and I'll tell ya...
I don't think a 25bp raise in the fed funds rate, from ~0, even matters. So right now I don't really see why they shouldn't. I think the markets will overreact to the announcement though even though it is widely expected to happen.
Based on economic models, the increase in short term interest rate by 25 basis points should barely have an effect on GDP. HOWEVER, you should take into consideration the psychology of how people think. It's going to have a significantly bigger effect than what the models predict. Consumers aren't always rational in the way they think and psychology plays a HUGE part in consumption.
That along with the current state of China should be more than enough reason for the Feds to delay the increase in interest rate. They still have October, November, and December to increase the interest rate. Why not wait it out for a little more? It's just a couple more months.
My educated guess is that the Fed won't raise rates. Inflation is essentially 0. Raising rates in light of our #s on inflation literally contradicts the Fed's position. Add in the fact that commodities prices--particularly oil--have plummeted, so higher rates puts more downward pressure on dollar denominated oil, which will be borderline deflationary. Then you've got a massive economy--China--and huge trading partner struggling to keep its head above water (and it just devalued its currency) and a jittery stock market, and I just don't see how the Fed raises rates until at least December, if not later. Our annualized growth rate is around 2% with about 0% inflation. There's really no justification for raising rates--the Fed missed its window in 2013.
This. I like to focus on China and the uncertainties elsewhere. The dollar has strengthened considerably over the past year. A small increase in rates might not hurt, but I don't think it's going to help either. What I am interested in is seeing if China is substantially lying about their numbers; it's the wild wild west over there.
Yellen doesn't have it in her to do it. It's going to be a long time before any raise. As others have said with inflation and COL rising in some cities, it's just not the time to do it...
I agree with Virginia Tech 4ever's comment. Current economic conditions do not pose fit for a tightening. A move by the Federal Reserve to raise interest rates is unprecedented in this situation.
"Current market pricing has the chances of such a move at the Fed’s Open Market Committee meeting next week at around just 28 per cent, compared with more than 50 per cent a month ago. "
While economists think the Fed will raise interest rates, the market believes otherwise.
From CNBC: http://www.cnbc.com/2015/09/10/rate-hike-now-doesnt-seem-a-prudent-risk…
"Data on the three areas the Federal Reserve cares about most—inflation, employment and financial stability—are all indicating the central bank should hold off on raising interest rates, former Treasury Secretary Larry Summers said Thursday."
almost 1 year ago...
http://www.wallstreetoasis.com/forums/how-will-the-us-rates-hike-affect…
my sentiment stays the same just moved up a year, I'd be shocked if the 10y was over 2.5% by year end
Highly doubtful.
Not until next year at least.
I think the Fed will raise rates in December, concurrent with a downward move in the dot plots. I hope the Fed makes the move... it would confirm a positive view on the economy and settle a lot of investor uncertainty. I just hope they don't move too aggressively after the first increase.
It would confirm whose positive view of the economy? The global economy is very shaky, at best. China and India are both grinding to a halt, and the U.S. energy sector is in a tailspin. If anything, economists are starting to speculate on the likelihood of a 2016 recession.
Interesting graph to look at for those that believe in a rules based approach to interest rates:
http://www.benzinga.com/analyst-ratings/analyst-color/15/09/5832050/tay…
With the markets and economists now betting on an increase not happening, I'm inclined to take the other side. Regardless, I think the fed is going to be very explicit this week and will say one of three things: 1) We are raising rates today; 2) We are raising rates at X meeting (October or December); or 3) We are not raising rates until next year. I think with all of the uncertainty the fed will try to be a little more clear this meeting.
I've been on WSO for many years but haven't posted much. But I feel pretty strongly about this topic so here goes:
The low rate environment is doing much more (long term) harm than near term good.
First, the bad being caused by keeping rates low: 1. Low rates encourages risk taking in financial markets as investors search for yield 2. Low rates squeeze interest margins for banks (or causes them to seek out riskier investments) - in either situation it puts pressure on their capital cushion in a bad environment (which - exacerbated by BS regulations - will/is driving smaller banks that don't have economies of scale out of business thereby further introducing risk into the financial system) 3. Inflation is not 2% but you can't wait until 2% to pull the trigger, it'll be too late by then. The best way to manage inflation and expectations is to lay out a long table (~100bp increase /year) and stick to it. No surprises, no sudden fed movements. The fed needs to dictate to the markets, not the other way around.
Then, the neutral: 1. All of the real reasons to not raise rates (dollar appreciation, market turmoil, govt. borrowing costs, etc) would hardly be affected by a 25bp increase 2. Employment is at 5.1%, not going to get much lower than that and low interest rates will not necessarily boost labor participation rates
Finally, the good that would be caused by raising rates: 1. From a psychological standpoint, I think a fed rate hike would signal confidence in the economy, not weakness. If anything, I think you'll find bond prices may drop in the short term, but stock prices should definitely rise over the medium term as long as the fed doesn't S#*t the bed. While most debt traders tend to be younger (many haven't seen a rate hike let alone a full tightening cycle) most institutional PMs tend to be older and more experienced so I would expect less volatility there. 2. From a practical standpoint - higher interest rates should attract more global capital 3. The funds rate is one of the fed's most important policy tools to manage economic cycles. Don't think we're at risk of a recession any time soon (losses in the energy sector from low energy prices are a. short term, and b. will more than be offset by gains in the rest of the economy as a result of lower costs for just about everything except labor). If the fed keeps rates at zero, it has very few levers to pull in the event of another recession. They need to raise rates when you can so you can lower them when you have to.
4. This is an important point and somewhat dovetails with #1 (psychology) - the fed has been saying it will raise rates for ~3-4 years. At some point, it will begin losing credibility if it keeps holding off. That's a big problem.
Yellen needs to do the right thing and raise rates. I'm sure it'll come later this week.
Finally someone with good sense.
The real reason Yellen's hesitant to raise rates is probably the fact that China, Japan, South Korea, the Eurozone, Russia, and Latin America are all making QE-esque moves essentially exporting all of their deflation to the dollar, the main funding currency, which has also gained about 30% over the past year. Yellen's point on deflation isn't unfounded. Not to mention that US multinationals are struggling enough with the strong dollar already
It's difficult being correct so often.
I mean, I wouldn't say any country with sustained GDP growth of >5% YoY is "grinding to a halt". But whatever makes you feel correct, I suppose.
Ribbing aside, I agree that short rate normalization won't begin until ~2015 year-end.
I don't need to "feel" I'm right. I was right.
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