Economists Unsure About Fed’s Rate-hiking Cycle’s Date
U.S. Central bankers face a very tough decision: raise interest rates in September as was highly expected just a while ago or wait a bit longer? They are probably still hesitating on this issue. While everyone is speculating and economists remain divided on the actual date, Federal Reserve officials have been urging investors to stop focusing on the actual timing of rate hikes. Those officials have been trying to put an end to all this speculation over whether they vote to move in September, saying that in the end it really doesn’t matter when the rate-hiking will begin as it’s going to happen very slow anyways.
But economists argue that the date for liftoff will mater tremendously, especially if the FED’s Open Market Committee decides to make this move in a month that is likely to be a highly volatile one for financial markets.It is also very reasonable to assume September will be such a month, and that because of several reasons: Expected continued volatility in shares, weak corporate sales figures and an economy that is likely to give back at least some of the gains it achieved in the second quarter. In addition, numerous historic trends are hinting towards a rather difficult next-coming month that already has a bad reputation in itself.
Bad Augusts regularly lead to bad Septembers, and in this case a particularly difficult backdrop for the Fed. One statistic tells us that September is the only month in which the S&P 500 fell more frequently that it rose. Another one sais that when the index fell more than 5% in past Augusts (it was down 6% on Monday), September followed with a decline 80% of the time, with an average drop almost 4%.
Moreover, while GDP unexpectedly jumped 3.7% during the second quarter, the third quarter is tracking at merely a 1.2% gain, according to the latest reading from the Atlanta Fed. Furthermore, a stronger dollar, the latest slowdown in China and notoriously volatile payroll growth figures from August doesn’t make things seem any better. In short, it really appears that the Fed missed its window for raising rates.
A large number of economists are therefore arguing that a rate increase might better be postponed to a later date in 2015 or early 2016 when the climate for such a change would be appropriate. They are thus suggesting that the Fed stays on hold longer in the middle of an unprecedented nearly seven-year run of zero interest rates.
“Although we continue to see economic activity in the U.S. as solid and justifying modest rate hikes, we believe the Federal Reserve is unlikely to begin a hiking cycle in this environment for fear that such a move may further destabilize markets,” Barclays economists said in a note last week in which they pushed the expected date for hiking out to March 2016. “Given the uncertainty around the current global outlook, the timing of the rate hike seems more uncertain than usual.”