US Federal Reserve set to make interest rates decision

While the Federal Reserve is widely expected to raise the Federal Funds rate on Wednesday for the first time in almost a decade, that does not necessarily correspond to an increase in mortgage rates.

So it seems to me the risk of the economy hitting the recession when monetary policy is not in a position to respond are much greater than they have been previously and therefore, we need to be very cautious about doing anything that would increase those risks.

After more than a year of posturing and a couple of false starts, the US central bank is seen raising its rates by a token 25 basis points.

Should the Fed raise rates on Wednesday, that would conclude an unprecedented era in central banking in the US, as near zero interest rate policy and quantitative easing were deployed to revive the economy following the 2008-2009 financial crisis.

Shortly after that, Yellen meets the media to explain the decision. The cost of getting a loan has been close to free for the past few years, which is ideal during recessionary times: When loans are cheap, that encourages people, businesses, and investors to spend money, which stimulates the economy.

The move by the Federal Open Market Committee, which will make the decision, is forecast by a vast majority of economists despite moderate growth and low inflation in the U.S. A hike would be “an attempt to recalibrate, not restrain”.

“Money markets have not fully discounted a Fed rate hike, so there is scope for the USA dollar to have a knee-jerk upside reaction”, Elias Haddad, a currency strategist at Commonwealth Bank of Australia, told Bloomberg News.

That doesn’t sound good for our wallets, but it’s not all bad news.

Look, the Fed has standards, too. “The value of waiting outweighs that of acting now”.

“It is only in the latter stages of a Fed tightening cycle – when interest rates are clearly restrictive – that equity bear market conditions tend to develop”, he says.

The markets, meantime, have fully priced in one rate increase, but not subsequent ones, said Ubide, who believes the Fed will raise rates by quarter point increments four times in 2016.

Just as turkeys are opposed to Christmas on culinary grounds, so investors in risky assets like junk bonds are forever and always against interest rate hikes. However, the Fed is more concerned about the potential for inflation to pick up rapidly when it does start to rise and would rather manage this early with small gradual hikes, than have to tackle it head on more aggressively a year or so down the line.