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Will The Fed Hike Rates and Should We Even Care?

The financial press and many market participants are all abuzz about whether the Federal Reserve (Fed) will raise rates in September, December or at all this year.

Fed Officials Gain Confidence They Can Raise Rates This YearThe Wall Street Journal

Slowing job growth in Aug. lowers odds of Sept. rate hikeUSA TODAY

To be honest, this narrative is getting old, very old. The Fed has been talking about raising rates for YEARS and has only managed to increase them once, by a measly .25%. To make matters worse, the Fed’s forecasting record for expected economic growth has been abysmal. For 5 years now the Fed has been overestimating economic growth and then revising their forecasts lower. It reminds me of the old joke.

“Why did God make economists? To make weather forecasters look good.”

So, will the Fed hike interest rates in September 2016? Chairwoman Yellen has stressed on multiple occasions that the Fed will be “data dependent” when making its decision whether to raise interest rates. So let’s turn to the data.

  1. First half GDP growth in the U.S. clocked in at 1% - indicates no hike
  2. Most recent jobs number for August – below consensus forecast – indicates no hike
  3. Most recent manufacturing ISM report recorded a reading of 49.4%, or contraction, in this sector of the economy -  indicates no hike
  4. Most recent non-manufacturing ISM report indicated a slowdown from the previous months reading, coming in at 51.4%, close to contraction territory – indicates no hike
  5. Risk of causing a “market event” before upcoming U.S. presidential election given the futures market is pegging the odds of a September rate hike at less than 50% - indicates no hike
  6. Fed’s forecast for accelerating economic growth in the back half of 2016 – indicates a rate hike

That makes 5 “no” answers to 1 “yes” for a rate hike. And as such, we are strongly in the no rate hike camp for the September Fed meeting.

But even if they do raise short-term rates then, should we care? Not really.

But how can that be possible with the financial media and market “gurus” parsing every single word that comes out of the Fed? Because even if they do hike, it will be a VERY, VERY slow and gradual process to increase interest rates.

The fact is, with subpar economic growth both here in the U.S. and globally, coupled with elevated debt levels, the Fed does not have the ability to raise rates in a meaningful way without risking serious damage to the financial markets. And the last thing the Fed wants to do at this point is to destroy the supposed “wealth effect” of rising asset prices. So until such time as we see readings indicating sustained economic growth, don’t expect much in the way of meaningful rate increases. Rather, expect to hear more of what we have been hearing for 5 plus years. A lot of hot air.