Toroption 13:46:06 GMT / 22 June 2016
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Markets await Fed to finally make up their minds – 14/09

Will the fed raise rates this month?

 

Market volatility until the Fed will make up their minds

Will the Fed raise interest rates or not? That’s the question that’s on everyone’s minds these days.

Stocks were down on Friday because of worries that the Fed might boost rates sooner than expected.

Stocks then took another tumble Tuesday as oil prices sank. The Dow was down nearly 250 points in midday trading as energy stocks took a big hit.

Lower oil prices should mean lower inflation, though. And that could keep the Fed on the sidelines a little longer.

So when will the Federal Reserve act? It has raised interest rates just once since the financial crisis in 2008 – a quarter-percentage-point hike last December. Rates are still very close to zero.

Some market experts – and even Fed members — have been talking more lately about why the Fed should soon look to “normalize” interest rates.

So why should the Fed raise rates?

The job market is improving. Unemployment is low. Job gains have been steady, if unspectacular. That’s a good sign for the economy, and a reason to end the crisis-era level of interest rates.

The market is stable. Stocks are not far from record highs. Corporate earnings, while not great, are expected to improve in the latter half of 2016 and into next year.

Household income is up. Consumers are finally making more. Median income rose 5.2% last year, the first increase since 2007. That’s largely because the healthy job market is starting to push up wages.

These are all good signs. But there are still some reasons for the Fed to avoid the raising rates for now.

The rest of the world IS in crisis mode. Rates are extremely low in Europe and Japan. China’s economy is slowing.

It’s hard to justify why the Fed should be the lone wolf and start pushing rates higher when other central bankers are keeping rates low.

The election conundrum. Yes, the Fed is not supposed to be political. But Republican nominee Donald Trump has been criticizing Fed chair Janet Yellen and the rest of the central bank for keeping rates too low. Should Yellen raise rates now and risk looking like she’s responding to Trump’s attacks?

Wages may be up, but where’s the inflation? The Fed is supposed to only worry about two things. Employment and price stability. Managing the emotional market has become an unofficial third mandate.

The job market has improved. But wages, while higher lately, are still not up enough to spark realistic worries about inflation.

Oil prices have started to pull back again as well and remain well below where they were a few years ago. Other commodity prices – particularly those related to food – have plummeted, too. That’s good for consumers but it’s put pressure on big grocery store chains.

Add all this up and it looks like the Fed may be warranted in holding off on a rate hike.

But make no mistake. The sleepy days of summer are over. Investors are back to reacting to every piece of data and wondering what it will mean for the Fed.

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