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Will the Improving Economy Cause the Fed to Raise Interest Rates?

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Will the Improving Economy Cause the Fed to Raise Interest Rates?

The policymakers at the Federal Reserve will be meeting next month, and it is then we will find out if they will decide to raise interest rates.

Some policy makers, along with other economic experts, believe that a rate hike is imminent, considering the currently improving economy and market performance.

Below, we’ve included the Fed Funds Rate Since 1990. You can see the Fed rate plummet in 2008 and it’s been there since…

fed funds rates

April’s Minutes

The Federal Open Market Committee (hereafter referred to as FOMC) met last month to analyze data and determine if a rate hike was due.

After all the analysis of all the information, it was found that if conditions continue to improve on all fronts, a rate increase would be likely.

It is not a foregone conclusion that growth will occur, as some differ in opinion about meeting certain conditions within a particular time frame. Further data analysis will be needed, as well as a close watch on market performance up until the meeting takes place.

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Market Swings After Minutes Release

Once word got out that one can expect a June rate increase, even though they did not make a final decision, some stocks, along with 10-year Treasury bonds, went down with an expectation of a rate hike.

Although the first quarter was nothing exclusive, data shows that a much better second quarter is on the way.

These indicators of a second quarter upswing are to an extent what has policy makers considering an interest rate increase next month.

A chart was released, based on federal futures prices, and it relates to the percentage indicating the likelihood of a rate increase. Here are a few of the upcoming meetings and portions, the differences being between the few hours before the meeting minutes release and shortly after the publication.

  • The chance of increase stood at about 15% before minutes release for June 2016.
  • The chances doubled to 30% after the publishing of the minutes.
  • The pre-release percentages are at least 10% lower than the expected percentage chance of increase post-release for each month indicated

The more the markets improve, the more likely a rate increase will occur in June.

 

Other Data Factored In

Other numbers were crunched to help Fed policy makers determine if price increases were due to help balance things out.

The other data comes from:

  • Rising CPI (Consumer Price Index)
  • Growth in housing numbers
  • Growth in consumer spending numbers
  • GDP (Gross Domestic Product) is trending upward towards a positive growth
  • England’s potential exit from the E.U.
  • China’s economy

 

Too Soon?

April’s Fed meeting ended up with quite a few participants concerned that a June rate hike would be too soon.

December of 2015 was the last time the Fed raised rates, and many experts believe that the markets do not fear the possibility of a rate increase.

Other experts say the outlook is not complete, and it is too early to determine if a rate hike is necessary. The FOMC looks at the Global performance along with the volatility of the markets over the last few months.

April saw the termination of analysis which was also called balance-of-risks statement.

In the March statement, global uncertainty was reported as a significant risk, but the April report did not include the risk.

What all of this means is that the FOMC’s assessment of risks for April was less than it was in March, which is why global data did not get a warning about the data for the April report.

But with so many international economies shifting to negative interest rates, there could be complications in raising rates.

What Investors Believe

Many investors in stocks, commodities, and bonds believe that the Fed is foretelling a rate increase, rather than warning of the possibility.

A huge selling took place right after April’s meeting minutes were released.

Although a rate hike is likely, it is still not definite, but investors are apparently not taking any chance, selling now instead of in June.

 

Money Manager Disagreements

Many money managers say that is way too soon for the Fed to consider, much less show possible intent to move forward with, a rate hike in June. Part of this concern is that the referendum regarding the U.K.’s possible E.U. exit will not take place until a week after the Fed’s meeting.

The money managers believe that the decision by the U.K. will have a direct impact on the markets, and the data the Fed is looking at is not complete and detailed enough to make a proper decision so early.

 

Conclusion

As with any situation, there are two sides of experts. One side says that a rate increase would spell nothing but trouble if it were to happen as soon as June.

The other says that as long as the markets continue to show an upward trend, a rate hike would likely be necessary.

Until the meeting happens, it is hard to know what to expect.

However, given the Fed’s language and actions in April’s meeting, many experts are looking at it as a sign that the increase will happen, although June’s meeting is still on the horizon.

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