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The Federal Reserve appeared to be leaning toward a rate hike in September, according to the Fed’s July meeting minutes, released Wednesday.
However, as has been the case in recent meetings, the Fed minutes left the door open for pausing on a rate hike at least until its meeting in December.
It is also important to note that capital markets and economic conditions haven’t exactly improved, to say the least, since the Fed’s last meeting held July 28-29.
So the question still remains: Will the Fed raise interest rates in September or not? One could argue intelligently on both sides of the question.
Why the Fed May Raise Rates in September
The Federal Reserve has clearly and consistently communicated that it wants to see two things before it raises rates:
- Maximum employment
- A target inflation rate of 2%
The July meeting minutes are quick to cite that, since the previous meeting in June, “the housing sector has shown additional improvement” and the “labor market continued to improve, with solid job gains and declining unemployment.”
Although there has been no consistent, concrete number that defines “maximum employment,” the unemployment rate currently sits at a healthy 5.3%. This hints at sound rationale for a rate hike in September.
On the inflation point, it is below 2% now, but the minutes clarify that the Fed will remain proactive and raise rates when it is “reasonably confident that inflation will move back to its 2 percent objective over the medium term.”
Yes, inflation is low, but the Fed can reason that it wants to stay ahead of the curve and raise rates before the 2% target is reached and surpassed.
While these major points justify, by their rationale, a rate hike in September, conditions on the ground will still speak loudly to their decision at that time.
Reasons the Fed May Wait to Raise Interest Rates
Since the July Fed meeting, oil has fallen dramatically in price, employment gains have continued to level off, gross domestic product growth has slowed and there has been volatility in the global economy and financial markets.
A Fed rate hike could push oil prices lower by virtue of strengthening the dollar. This could also push down inflation. Higher rates could also put pressure on equity prices and weaken the housing sector by lifting borrowing rates.
And with still so much uncertainty over the timing of the Fed’s next move, a rate hike in September could cause sharp declines in stock and bond prices – as has happened in the past, most recently in 2013, when the Fed botched its communications over its quantitative easing policy.
Does it Really Matter When the Fed Rate Hike Comes?
Unless economic conditions significantly erode over the next few weeks, it appears likely that the Fed will raise rates at its next meeting in September.
But does it really matter if it does it now and not, say, in December? As for the long-term, big-picture view, it probably doesn’t matter, unless you are about to buy a house and the higher rates impact your financing capabilities.
It is important to keep in mind that higher interest rates generally point to a healthy economy. Also, the Fed has made clear that it will keep rates low for a long time.
The Fed minutes reaffirmed that the “0 to 1/4 percent target range for the federal funds rate remains appropriate.” And in a reassuring note, the minutes made clear that “economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”
Also, it is likely that a Fed rate hike is already priced into stocks and bonds now and a small move in September may be just what the market needs, although it may not appear so at the moment.
From this big-picture perspective, consumers, businesses and investors may be best served by a Fed rate hike sooner than later to stop all the worry and guesswork surrounding the decision.
Kent Thune is the owner of an investment advisory firm in Hilton Head Island, S.C. Under no circumstances does this information represent a recommendation to buy or sell securities.
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