What Larry Summers thinks about raising interest rates

For years, the Fed had been lowering the rate to make it easier for people to borrow money.

Many signs point to the Federal Reserve raising interest rates this week during its two-day Open Market Committee meeting.

“We still think that the Fed’s dovish language will overcompensate for the central bank’s first rate increase in 10 years and so we are looking for a modest bounce in most markets in the aftermath”, said Edward Meir, senior commodities strategist with INTL FCStone, in a note to clients.

The Fed has said it would raise rates when it sees a sustained recovery in the economy.

West Texas Intermediate (WTI) fell 60 cents to $36.77 a barrel and Brent was down 80 cents at $37.65 to leave them heading back towards Monday’s 7-year lows.

“I now judge that United States economic growth is likely to be sufficient over the next year or two to result in further improvement in the labor market”, she said.

While the markets have been expecting the hike for months, emerging market currencies don’t look to have prepared themselves, and many are falling back against the dollar on Wednesday. The June and September meetings were heavy favoured candidates but now after a sentence in the October statement the market is awaiting the announcement and the rate to be 0.50 percent.

“Near-zero interest rates in place since December 16, 2008, was in essence emergency medicine the Fed put in place when the USA economy was on life support”, said PNC chief economist Stuart Hoffman.

The low interest rates did help revive the stock market. 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.

“Third, current low-inflation rates are a reflection of a plunge in oil prices, imported deflationary pressures from overseas and a sharp broad-based rise in the dollar”.

Investors may see a slow down in the stock market after the Fed raises rates.

It is possible that markets have priced in the rate hike, Yesilada said, but it is also possible that some emerging market currencies will fall sharply against the US dollar.

For all the talk of abnormal times and changes in underlying economic fundamentals, the Fed is pinning its hopes on a very conventional premise – that the USA consumer will keep spending at recent strong rates, encouraged by low unemployment and the apparent beginnings of higher wages.

Should the Fed raise rates as expected, the focus would immediately shift to three things, starting with Yellen’s press conference: the pace of future rate hikes, the gap between the Fed’s and market’s expectations for the Federal Funds rate, and the endpoint of the Fed funds rate in this hiking cycle.

The Fed chose to hold off on hiking rates.

Gold prices rose on Wednesday, rebounding from a one-week low, as some traders closed out bets on lower prices ahead of a closely watched Federal Reserve decision on interest rates.

But the recovery from the worst economic downturn since the 1930s has been a long haul.