The Fed is NOT going to raise rates anytime soon. In their statement on Wednesday, I feel their language will remain dovish. Here are my reasons:
1) There is no question that some parts of the economy have improved over the past 5 years, but there are other parts that are still fragile (specifically wage growth, housing, and the retail sector). The last thing the Fed wants to do is raise interest rates too soon (as they did in 1937) and possibly send the economy back into recession.
2) Geopolitical – There is too much uncertainty right now in Iraq, Russia, Ukraine, etc. Although the Fed has nothing to do with this, they definitely consider how the economy might respond to an environment of geopolitical uncertainty combined with higher rates.
3) Midterm Elections – Politics is a HUGE factor in many Fed decisions. There’s no need to rattle things with so many key seats up for re-election.
One final crazy thought: Don’t be surprised if they halt the taper or announce a plan for another version of QE (Quantitative Easing). It wouldn’t shock me at all if they mention some variation of future easing.
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