Will they or won’t they is the question weighing on the minds of many investors this week? In question is a Fed rate hike. Economists and strategists are divided. Financial markets say the odds are against a rate hike tomorrow.
If it is a question of if the economic data, higher rates are clearly justified. Even by the Fed’s own low standards, the economic data justifies a step away from emergency monetary policy. Unemployment is at the Fed’s target and while headline inflation is temporarily subdued due to falling oil prices and a strong dollar, the underlying trend of inflation remains near the Fed’s 2% target.
A hike tomorrow should be a done deal, but the fly in the ointment is apparently the recent stock market correction, the first of its kind in almost four years.
Though you wouldn’t know it based on the media coverage, the Fed’s mandate is not to prop up prices after every stock market correction (an event that historically has occurred about once every year). The Fed’s statutory mandate is to promote maximum employment, low inflation, and moderate long-term interest rates (the latter of which is often ignored by Yellen & Co).
The folk out arguing for yet another delay in the normalization of monetary policy aren’t thinking about Main Street. They aren’t thinking about you or the millions of other retired investors who have saved responsibly for decades only to be punished with zero percent interest rates. Nope, these folks have other motivations, many of which are likely focused on Wall Street’s bottom line.
When the likes of Lloyd Blankfein, Chairman and CEO of Goldman Sachs, Christine Lagarde, Managing Director of the IMF, Kaushik Basu, World Bank Chief Economist, Larry Summers, Former U.S. Treasury Secretary, Paul Krugman, NY Times Economics Columnist all publicly come out in favor of further delay, you can be confident it is not to the benefit of Main Street America.
Savers, conservative investors, and those in or nearing retirement have paid for the sins of Wall Street long enough. It is long past time for Yellen & Co., to start normalizing interest rates.
UPDATE (9-17-15)
The Keynesian cabal’s recent calls for the Fed to stand down (see links above) apparently swayed Yellen & Co., away from making an infinitesimal increase in interest rates for the first time in almost a decade. The justification for the delay from Yellen was light on substance (global uncertainties were cited) and a clear indication to market participants that the Yellen Fed like the Bernanke Fed before it, remains a slave to Wall Street.
What are the implications of the delay in the Fed rate hike for you? Ironically, it may mean greater financial volatility and a more bearish outlook for risk assets. During her press conference, Yellen signaled that the Fed’s economic outlook hadn’t changed significantly and that most members of the policy setting committee still expected the first interest rate hike to occur this year. Until and unless that changes, the prospect of higher rates may keep a lid on stock market gains. I say may, of course, because a prediction of short-term stock price movements (even our own 😉 ) is nothing more than an educated guess.
Jeremy Jones, CFA
Latest posts by Jeremy Jones, CFA (see all)
- The Worst Chinese Economy in 30 Years - October 18, 2019
- Can Boris’ Brexit Deal Pass? - October 17, 2019
- Are Low Interest Rates Amplifying Market Shocks? - October 16, 2019