Still, Yellen continued to say that a rate increase was likely before year’s end.
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The Fed’s low-interest rate stimulus program not only helped get the US out of a recession, it also helped fuel the massive 6-year stock market rally.
Although all of the targets set by the Federal Reserve for an interest rate hike have not been met, the central bank is expected to raise interest rates by 0.25 percent on Wednesday – the first rate increase in seven years. Janet Yellen, the 15th chief and first woman to lead the Fed, now apparently has the evidence of U.S. economic health amid a quick rebound in the labour market, an upward revision in economic growth data, and a renewed spark of pricing pressure. Another reason why markets expect the Fed to move tomorrow, is the credibility issues it would face should it decide to hold again.
Following the 2008 recession, and ever since, the federal interest rate has remained at about 0%, which made it easier for businesses to stay afloat and hire new employees.
The Fed’s key inflation gauge has increased just 0.2 percent over the 12 months that ended in October. Higher short-term borrowing rates for banks will make things even tougher and banks will likely try to further boost fees on checking accounts and other services, and charge higher rates for short-term credit-credit cards, vehicle loans and home improvements.
“We urge the Fed to avoid making a mistake by raising interest rates tomorrow”, he said in a statement. Put differently, the Fed would rather avoid a situation where it has to play catch-up and tighten financial conditions too quickly in the future than take the risk of not having enough runway to lower rates later.
Of the 207 executives polled, more than 50% said they expected the rate increase would have a “somewhat positive” or “very positive” effect on their business. Stronger growth means more and higher-paying jobs, and more full-time work for those now only able to work part-time.
A rate hike is generally viewed as bearish for gold, which is not attached to interest rates and struggles to compete with high-yield bearing assets.
No matter what the consequences will be, the financial world had better get used to higher United States interest rates.
The Fed hike announcement is coming tomorrow but what moves the market may rely more on how the rates market behaves afterwards. Now as economic indicators like low unemployment and increased consumer spending tick toward the positive, many economists are pointing to a limited rate hike as a way to move the economy towards normalcy after the volatility of the past decade.
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Over the long-run, the markets will adjust to the higher rates and stronger U.S. Dollar and gold, the Euro and British Pound will resume their respective sell-offs.
