This Thursday, September 17th, the Federal Reserve will announce their decision on interest rates at 2PM EST. I don’t think they will raise rates for the following reason:
1) Since the financial crisis of 2008-09, the Fed’s number one priority is to see a strong recovery in the economy. They have done this by keeping interest rates low and pumping money into the system through various forms of accommodation. Has the economy recovered since 2009? Of course it is stronger. But is it still fragile and susceptible to another downturn? This is definitely a possibility as growth is slowing in both the US and worldwide.
The biggest problem the Fed faces is the impact of a rate hike on the rest of the world, especially the fragile emerging markets. Because other Central Banks have copied the US playbook of quantitative easing (QE), a rate hike presents too many potential domino effects with global currencies, commodities, bond markets, and of course the stock market (which the Fed watches tick by tick). If you don’t believe this, you clearly haven’t been paying attention to the timing of their comments over the years. My point is: Why would the Fed possibly jeopardize a downturn in the economy and the stock market when they have come this far to make sure it will recover properly? I think they would rather be late in raising rates than acting too soon.
2) If I am wrong and they do raise rates, it will be the most dovish rate hike in the history of rate hikes. They will use language such as “one and done,” “we are willing to cut quickly if needed,” and they will line up a bunch of Fed speakers in the weeks following this meeting to soothe the markets just in case it drops too much.
3) If I am right and the don’t raise rates on Thursday, then consider this issue done for the year. There is no way they will raise rates in December during the Holiday shopping season. I will moonwalk through Times Square in an Elmo costume if they raise rates in December. The next earliest rate hike would be in March 2016, when they might do one hike and remain on the sidelines for the rest of the year because of the upcoming Presidential election.
Either way, I do not envy the job of the Federal Reserve. Remember, it is not just the US economy that factors in their decision. They have to consider global economies, the US consumer, currency effects, global unrest, political pressures from other countries, and of course the upcoming election in 2016. Sounds easy, right?
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