Raising rates ahead of elections or right after may not be in the cards for the FED. The FED anticipates a market correction if a rate hike occurs. They view a rate hike as a shock to the markets but good for the economy. The last rate hike caused more than the anticipated five percent correction. One FED official expected more than a five percent sell off in equities if they raised more than one percent not a quarter percent. To me it sounds like the FED is fallible and their outlook is hindered because of the wealth effect that has ensued based on easy policy forcing money managers to buy stocks. The FED and other central banks have delved into this abyss and can’t seem to find their way out. Are they captured? Is the economy really still in “Code Red” after all these years? Why does the economy still need accommodation? If so why even speak of raising rates? I think the US elections have much to do with this. Populism seems to be on the rise and I’m sure the FED and other central banks are fanning the fire. One hand they may cause more distrust if the markets sell off and on the other the right thing to do for the economy is raise rates.
Most of US GDP comes from the consumer and not exports. Raising rates may hurt corporates by strengthening the US Dollar thus hurting exports and overseas carry trades but in the long run a strong dollar help US consumers. A stronger consumer should in theory help our economic system and create more jobs. Another reason why raising rates may cause corporate dissent would be off sore tax havens holding billions in other currencies which may lose value because a stronger dollar.
When the FED raised last time Yellen said they were not data dependent. In my view, if they didn’t raise they would have lost all credibility. For months FED representatives talked up a rate hike and then delayed over and over again. The financial media took this as a total loss of credibility. The fed saw the writing on the wall and can’t afford to lose credibility at a time when they no longer have to tools to boost the economy.
The Stanley fisher’s theory of rates may be on the way and we may have just seen a recent trial balloon in the last addition of the Regional Economist. The prevailing thought is, Raising rates after a long period of easy policy causes inflation. Maybe we shall see after elections.
Series 3 Licensed
Senior Market Strategist
Daniel started his career as a broker with Lind-Waldock in 2007. He is well diversified in the markets with the indexes and currencies being his favorites. Daniel can often be found quoted in industry sources, such as Bloomberg, Dow Jones Newswires, WSJ and Futures magazine.