Speculation and anticipation is growing and not just among economists, as Fed Chairman Janet Yellen is running out of excuses not to raise interest rates at next week’s Federal Reserve policy meeting.
It seems that just about every indicator is saying a move would cause government bonds and the equity market little disruption but the debate remains whether the US economy has recovered sufficiently to allow the tightening of monetary policy to begin.
Investors and the public alike have had plenty of time to get comfortable with the idea that interest rates are going to rise; the Fed has been introducing the possibility of a move since early 2015; but while the move to increase is inevitable, if not this month, certainly by the turn of the year experts predict, most are saying it’s not just about the move itself, the most important thing is the statement that accompanies it which is expected to point towards a very gradual approach.
The usual argument for raising interest rates is to dampen an overheating economy in order to subdue inflationary pressures but this is obviously not the case this time. Wage stagnation, a strong USD and the fact that inflation is well below the Fed’s own target of 2%, ignoring many other economists 4% figure, are all strong arguments to hold tight again for the time being.
Although in many aspects of the economy a rate increase has no doubt been priced in already, the fact still remains that when it does come, the people that will be affected most are the general public, specifically the vast majority with a mortgage on their property.
In itself an increase in the base rate, no matter how gradual or quick means very little, the important matter is how the banks and financial institutions pass this increase onto the general public, which is yet to be seen.
It is going to be a very interesting week no matter what, the meeting is scheduled for the 16th & 17th September so keep your eyes and ears open; one thing is for sure, volatility is likely to continue regardless.