To be or not to be? That is the question posed by global economists when considering whether the Federal Reserve Board will raise interest rates at its upcoming forum.
The next meeting of the central bank members is scheduled for September 16th-17th and speculation of a rate hike—the first in seven years- has been a major concern worldwide for months.
The small increase-.25 percent at most-- seemed like almost a sure thing when originally proposed but its implementation has been questioned as a result of a continuous string of global events, primarily the turmoil in China which has turned many global economies on their heads.
The Fed itself is anxious to break through the federal funds rate barrier where it has been frozen at zero percent since the financial crisis of 2008
The Fed itself is anxious to break through the federal funds rate barrier where it has been frozen at zero percent since the financial crisis of 2008 and believes that the U.S. economy is strong enough to handle the increase.
There are two sides to every argument, however, and when it comes to financial decisions, especially those that can have major economic implications in the U.S. as well as in other countries, there is no surety as to the outcome of the vote.
Award for Good Growth
Some analysts see the hike as a reward for five straight quarters of GDP growth along with a strong recovery in job creation. One official at a major U.S. banking institution went so far as to state that the postponement of a rate increase could actually be interpreted as a sign that growth is slowing down and not the other way around.
Moreover, officials from emerging economies are pushing for the increase so they can put their own economies in order. They believe that the re-pricing of the S&P 500 in recent weeks, prompted mostly by weakness in China and other foreign markets, may have actually given the Fed room for the rate hike.
Other analysts, however, fear that a Fed rate increase would raise the borrowing costs of many governments and companies. And both the IMF and the World Bank, concerned about slackening global growth, have recommended that the Fed hold off on the hike.
Fed Chair, Janet Yellen, finds herself in a quandary before the Wednesday meeting. She would like to see the Fed "normalize" monetary policy with a series of small increases over the coming two years. However she is not the sole decision maker and the final resolution will be made by the FOMC members who tend to base their verdict mainly on the most recent employment and inflation numbers.
The good news is that the job market has been strong, with unemployment falling to 5.1 per cent in August, the lowest since April 2008. Inflation, which ideally should have risen to just under 2 percent, slipped instead due mainly to the drop in oil prices and other commodities.
Growth May Weaken
Some Fed members are not convinced these numbers will remain intact, however, and believe that an interest rate increase at this time is not prudent. Stanley Fischer, Yellen's top deputy, argued last month that deflationary pressures could very well be short-lived and said that the Fed will not wait for inflation to hit 2.0 percent before raising rates.
Others concur that an increase at this time would be a serious policy error and that even the current unemployment data does not support an increase. In fact, they point to sufficient evidence of a slackening labor market including 2.5 million Americans who have given up looking for work and the large number of people forced to accept part-time jobs.
Stock Traders Confused
The uncertainty of a Fed move has equity investors confused. Some traders believe that the anticipation of an increase, no matter when it happens, has already been factored into the trading of the last few months and that the Fed move will have no impact on the value of equities. Wall Street analysts suggest that investors be ready to grab up stocks that make immediate strong moves such as interest-rate sensitive stocks. They advise that should a rate increase not take place this week, investors would do well to sell their bank stocks as well as long-term bonds. Cyclical stocks are a good choice for bulls as they do well when interest rates start to rise especially if the U.S. economy remains steady despite global turmoil.
The suspense will continue at least for the next few days. FOMC members are divided and with each member coming to the meeting with a different agenda, Yellen could have trouble reaching a consensus. The world watches…….