Interest Rates- Will They or Will They Not?

   Schwaben Blog

September 11, 2015

Weekly Statistics:

Today Week Ago Year Ago
11-Sep-15 04-Sep-15 11-Sep-14
S&P TSX 13,478 13,478 15,534
S&P 500 1,961 1,921  1,997
DJIA 16,431 16,102 17,049
OIL $44.79 $45.37  $91.55
USD vs CAD 0.7544 0.7564 0.9137
Gold $1,106 $1,122  $1,281

The Federal Open Market Committee (FOMC) is meeting  on September 15-16 to decide the course of interest rates for the US economy but after the recent turbulence in Chinese economy, devaluation of Yuan, and extreme volatility in equity markets, the chances of an interest rate hike by the Federal Reserve are minimal. According to the CME FedWatch tool, there is a 24 percent probability of a rate hike in September and 38 percent probability in October. The former Dallas Fed president, Richard Fisher is one of the few economists who are calling out the Fed to raise the interest rates before it’s “too late”. According to him, the Dallas Fed’s measure of inflation, the trimmed mean rate, has been running steadily at 1.6 percent over the last year and if Fed were to focus on this measure then they would have little problems raising interest rates. But the overall inflation rate is still well below Fed’s target rate of 2 percent and even if we look at the core inflation rate, which strips out the volatile items like energy, it is still below 2 percent at 1.8 percent.

It  is also worth mentioning that 2015 is the third year in the presidential cycle and historically third year has been very good for markets. Since 1940, the Dow Jones Industrial Average (DJIA) has risen in 100 percent of the third years and gained an average of 22.3 percent. So far, the year-till-date return for DJIA is around -8% and if interest rates are hiked in the next meeting then equity markets are almost certain to suffer more losses, at least in the short term. We believe that the decision to hike interest rates is becoming more political than data driven. According to some un-named sources, Janet Yellen met President Obama 45 times over the last year. This clearly shows that the President is actively monitoring the Fed’s decision making progress and will not rush into raising interest rates like Japan did in early 2000s, which led the Japanese economy into a deflationary environment.

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