Activity in the options market suggests stock traders are being cautious ahead of the Fed policy meeting on 15 and 16 December, and options expiry at the end of next week could amplify volatility. It’s about what it will say. “We’re actually in pretty good shape to withstand these interest rate increases”, Humphreys said.
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Nearly all of the 91 economists in Bloomberg News’ separate monthly survey see the Fed hiking by a quarter point, ending a seven-year era of near-zero rates.
The tumult has spread throughout the world’s 7 largest economy, leading to impeachment proceedings of Brazil’s President Rouseff and raising the risks of sovereign debt and political crises across South America – all with the current zero-rate policies of the Federal Reserve. Such companies may also face the wrath of the market.
It isn’t the message investors want to hear.
Bond owners will suffer because bond values typically go down as interest rates go up. The central bank cuts rates to spur borrowing and spending when the economy is weak, and raises them when the economy strengthens to keep it from overheating and sparking high inflation. Although conventional belief is that financials are the major beneficiaries of higher rates, Credit Suisse recently discussed another approach to trading a Fed rate hike.
But keeping the interest rates and the flow of money where they’re at now could eventually start to hurt the country by fueling a whole new problem: inflation.
“Rates are not likely to rise as fast as they would like”, Swonk says. “There will be plenty of soothing words that this is just a small step that has been in discussion for some time and future increases will be very slow and gradual”.
Perhaps no sector has benefited more from ultra-low rates than housing, which was devastated by the real estate crash. The Fed chose to delay a hike.
Fed Chair Janet Yellen has been preparing financial markets for a rates liftoff this week as evidence grows that the United States economy is strong enough to weather tighter monetary policy.
“The case against the Fed is straightforward: In an attempt to jumpstart the economy out of recession, Greenspan slashed the federal funds target from 6.5% in January 2001 down to a ridiculous 1% by June 2003”.
“I think it’s more likely than not that the Fed will hike rates this week”, said certified financial planner Michael Conway, CEO of Conway Wealth Group. Diane Swonk, chief economist at Mesirow Financial, foresees only three quarter-point moves in 2016.
South Korea’s central bank said it will hold a meeting after the Fed’s decision and be ready to implement market stabilisation measures if necessary, as per its usual practice.
Yet, while the NAIRU model has a certain logic to it, economic trends give some cause for questioning the danger of renewed inflation – and provide a justification for caution that Yellen is likely to press going forward. When mortgage rates were at record lows during the financial crisis, nobody wanted to buy a house because the economy stunk [so] I don’t have this concern that it’ll put a dent in housing.
Consumer prices rose 0.2% in October from the month prior, in the first flicker of inflation since July. Even excluding volatile energy and food, prices are up just 1.3 percent. Some 62 percent don’t expect the Fed’s preferred inflation index, the personal consumption expenditures price index, or PCE, to achieve a third consecutive month of 2 percent or higher readings until 2017 or later. But another is the level of commodities’ exposure in high yield, especially of marginal producers hard hit by the continuing decline in prices. The nationwide average for a 30-year fixed-rate mortgage was 3.95 percent last week, virtually unchanged from a year ago.
Combined with expectations for future rate moves, it also guides longer-term interest rates which affect how much people pay on loans to buy homes and cars, how much businesses pay on their borrowings, and how much banks pay for deposits.
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While unemployment has fallen to 5% in the U.S., and the economy has been creating an impressive number of new jobs every month – over 200,000 this last November – wages remain flat and labour force participation rates, defined as the ratio between the aggregate labour force and the overall working age population, have yet to recover.
