Interest Rate Rise Still Likely Despite Market Downturn
As the Fed has had plans to raise interest rates before 2016, many wonder if it will still happen in the wake of the financial downturn over the past few weeks. The Fed has planned on raising short term interest rates in September, but some important numbers will come out prior to their September meeting that could change their benchmark federal funds rate, therefore changing the date of the rate hike.
An estimate for second quarter GDP, backed by more data than the estimate of July, will come out on August 27, 2015 and employment statistics for August will also come out prior to the Fed meeting. Both of these can potentially affect the interest rate decision, along with overall consumer confidence as reflected by the stock market. Furthermore, energy prices remain low, which is where the recent market downturn began. Some analysts point to these reasons of market tightening for the reason that the Fed will change its decision to raise rates in September, but a change is unlikely.
Analysts on the other side site a variety of reasons that the Fed’s plan for a September rate increase. Gold prices remain low which traditionally does not happen if people remain confident in the stock market and equity investments. The recent downtrend marks the 3rd longest period without a correction in the S&P that most analysts consider much needed. It has been 46 months since the last 10% correction in the S&P, and this correction, along with decreased commodity prices, could in fact stimulate the market. Three times since the 1970’s the collapse of commodity prices in the middle of economic recovery has ended up spurring the recovery on further.
Therefore, barring any major changes or increased, widespread panic on the part of investors, the Fed will likely continue with their plan to raise short term interest rates in September.