Market Volatility Could Postpone Rate Hike

September 17, 2015 12:54pm NYSE:DIA NYSE:SPY

technical bounceKyle Anderson:   The U.S. Federal Reserve began its two-day September meeting this morning (Wednesday) and investors are wondering whether Fed Chairwoman Janet Yellen will decide to raise interest rates now.


The Fed

And even though we’re just a day away from Janet Yellen’s press conference – which will take place Thursday at 2:00 p.m. – we’re still in the dark about whether an interest rate hike is coming.

Fed officials have now entered their self-imposed blackout period, when they cut off communication with the media ahead of the press conference.

It looked like we were destined for the first interest rate hike in almost 10 years until extreme volatility hit the markets in August.

A stock market crash in China sent ripples through global stock markets, and the Dow Jones fell 13.4% from July 20 through Aug. 25. The Nasdaq and S&P 500 were down 13.5% and 12.2% in the same time frame, respectively.

Now many economists believe a rate hike will be postponed until the FOMC meeting in October or December. Some believe it could be pushed back until 2016.

According to a Wall Street Journal survey, just 46% of economists polled expect the Fed to raise rates this week. In August, that number was 82%.

Barclays’ analysts have also pushed back their estimate on the next Fed interest rate hike. The investment bank previously expected the U.S. central bank to boost rates this week. Now their call for the first increase has been pushed out to March 2016.

According to Money Morning Chief Investment Strategist Keith Fitz-Gerald, this is not the time for Janet Yellen to raise rates. But as he points out, there’s no telling whether the Fed will actually make the right decision…

Why Janet Yellen Could Still Raise Rates

“I think it would be irresponsible of the Fed to raise interest rates now, but that doesn’t change the fact that they’ve ignored data and reality for so long that I think they’re going to go ahead and raise rates,” Fitz-Gerald said. “The Fed’s models don’t reflect what is happening to the middle class, which is getting eviscerated.”

If the Federal Reserve and Janet Yellen do decide to raise rates, Fitz-Gerald says investors can expect more volatility from the markets. Many investors may decide to take profits and take some money out of the markets for the time being.

But don’t panic if Janet Yellen raises rates and market appears choppy.

“There shouldn’t be too much of a market reaction to a rate hike,” Money Morning Capital Wave Strategist Shah Gilani said. “A rate increase of 0.25% in the Fed funds rate has already been talked about for so long that it’s mostly baked into prices now.”

As Gilani points out, any raise in the interest rates will be a small one – likely 0.25%.

“And beyond that 0.25%, there’s no need to hike further,” Gilani said. “The Fed isn’t going to destroy the wealth effect it’s engineered by doing something stupid to trounce stocks. That said, there is a chance investors could look at a rate hike as a profit-taking opportunity and sell stocks. But this won’t be a market buster.”

Money MorningBrought To You Courtesy of Kyle Anderson

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