Why is the FED still waiting for more information before raising interest rates?

The Monetary Policy Committee (FOMC) of the US Federal Reserve (FED) decided to keep its monetary policy unchanged, with a Fed Funds rate close to 0% within a range of 0.25% to 0.50%.
Once again, the FED wants to wait for more information before raising interest rates
Once again, the FED wants to wait for more information before raising interest rates ©

The FOMC wants to have more information before raising interest rates. Specifically they want to see different indicators (employment rate, PCE, consumption, etc.) heading towards FED objectives concretely and sustainably.

Janet Yellen still expects a rate hike in 2016. Last December, the FED targeted 4 rate hikes in 2016.

After several conflicting signals from some FED members regarding the pace of rising interest rates, Janet Yellen mentioned during her press conference that there is not much disagreement among its members. All agree that the “US economy is doing well” and that we should not wait too long before continuing – some economists would rather use the word starting – the US monetary policy normalization.

No rate hike in September, but every FOMC meeting is a “live meeting”

As expected and for the sixth consecutive meeting, the FED has not raised its rates, preferring to wait for more signs of progress towards its goal of full employment and inflation at 2%. Janet Yellen, however, said she still expects a hike in 2016 if the labor market continues to improve and strengthen. It is important that investors understand that each meeting remains a “live meeting”.

November may still be on the table, but this seems unlikely with the US election six days after the meeting and no press conference planned. The probability of a rate hike in December 2016 increased since the FED decision and Janet Yellen’s press conference.

“The argument for raising rates has strengthened”

The decision not to raise interest rates this month does not reflect a lack of confidence in the US economy, as the labor market has shown numerous signs of strengthening – with jobs created averaging 180,000 per month and participation rate increases, a stronger than expected growth, a rather strong consumer sentiment, and a wages growth – albeit modest…

The FED wants to be cautious, but 3 of its members voted for a rate hike as soon as this month, saying it was time for the FED to act and continues to normalize its monetary policy that begun last December. In the past 9 months, the FED seems to have adopted a “wait and see” attitude, sometimes quoting the weakness of the employment situation in the US, other times citing Brexit “risks” as “excuses” for not raising its rate.

Figure 1: The US dollar tumbles
Figure 1: The US dollar tumbles ©
Figure 2: US indices are up: NASDAQ Composite reached a historical high
Figure 2: US indices are up: NASDAQ Composite reached a historical high ©
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About the Author

Carolane de Palmas After graduating with a Masters in Corporate Finance & Financial Markets and getting the AMF Certification (Financial Markets Regulator in France), Carolane went to market analysis software company (Highwave360) to take part in the European launch of their new market analysis software (stocks and currency pairs). She then become an independent trader, investing mostly in European and American stocks and indices (CFDs) using macroeconomic and technical analysis.

1 Comment
  1. Is anyone else starting to think the Fed is a fraud? The Fed has been keeping rates artificially low for too long now. The US government holds $19trillion worth of debt. A rate rise now would cripple companies and individuals who have been borrowing cheap money for the past decade, cause a catastrophic shock to the stock market, fedgov obligations will soar while tax revenues collapse. Government debt would expand so rapidly that it would inevitably leading to default. Such an event would jeopardize the “election” for Hillary.

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