Will Fed hike interest rates?

Monday, Sep 14 2015

The FOMC announcement is expected to have the largest impact on prices this week. An interest rate hike will likely drive down the most USD rivals. However, there is a high degree of uncertainty going into the Fed’s two-day meeting which begins on September 16. Here are a few reasons for the (choose one) doubt, indecision, hesitation, vagueness, ambiguity, insecurity, improbability surrounding the Fed’s decision.

Firstly, while the FOMC would like to see long-term inflation reach its targeted goal of 2% before it lifts its benchmark interest rate for the first time since 2006, there are some hawkish Fed members including Vice Chair Stanley Fischer who believe the central bank could normalize policy before it reaches the threshold.

Secondly, the dovish Fed members will vote against a rate hike because they believe the global markets are too unstable to handle a rate hike at this time. They cite the weakness in China’s economy, stock market volatility and dovish central banks as three key reasons for refraining from a rate hike at this time. A vote against a rate hike in September will push it later in the year with December the most likely date since the Fed holds a press conference that month.

Lastly, early last week, World Bank chief economist Kaushik Basu told the Financial Times that the Federal Reserve would spark “panic and turmoil” in emerging markets if it decides to raise interest rates this week. He added that the Fed should hold off on a hike until the global economy is more stable. “I don’t think the Fed lift-off itself is going to create a major crisis but it will cause some immediate turbulence,” he was quoted as saying.

Christine Lagarde also cautioned the Fed that it shouldn’t rush its decision to raise interest rates and should move only when it is sure the decision is unlikely to be reversed later. “It (the Fed) should really do it for good, if I may say,” Lagarde said. “In other words, not give it a try and have to come back.”

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