Wednesday, September 16, 2015

FOCUS ON THE US FEDERAL RESERVE BANK: 25 bps rise in the Fed Funds rate predicted

Global investors are watching closely whether or not the Fed will raise interest rates for the first time in close to a decade at a two-day policy meeting that begins today (Wednesday, September 16, 2015). The most recent Fed Funds futures imply less than a 30% chance of a rate increase this week; however, I believe they will raise rates by ¼ of a point.

I believe it is time to start gradually raising interest rates given that in the United States we have seen the job market that has achieved sufficient recovery – and more importantly, the Fed needs to been seen as long-term focused and consistent in their policies. The Fed has said for years that the decision to raise rates would be supported by long-term data (not short-term volatility) and that the summer of 2015 was when they felt comfortable raising rates. 

The other side of the argument is that interest rates should remain at their current level in the midst of the recent global stock market turmoil and China's apparent economic slowdown. And the argument is that inflation remains well below the Fed’s 2% target level. The Fed's highly watched decision is expected to be announced by Janet Yellen (Fed Chair) on Thursday at 1:00 pm CST.

Most investors are leaning toward the view that interest rates will remain on hold for at least another month; however, if Fed officials raise interest rates this week it will likely lead to a stronger U.S. dollar and more money could be drained from emerging markets. While that might be the case, I believe the Fed needs to begin the process of returning normalcy to the global markets by beginning the movement back to market determined interest rates. We’ll see what they decide tomorrow!

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