Well-flagged Fed rate rise highly likely

In previous articles we discussed why rate hike from FED is still crucial, despite it being well priced in, beginning of a mega unwinding of monetary stimulus, our take on U.S. rates via term premia and impact on equities. It experimented with unconventional ways to stimulate the economy, pumping roughly $3.5 trillion into the recovery to boost the economy.

So just be ready for a bumpy ride in the global markets.

The Federal Reserve had tried to combat the effect of the sub-prime mortgage crisis by slashing rates aggressively from a high of 5.25 in June 2006 to 0-0.25 per cent by December 2008. The Fed has made it pretty clear that they intend to raise rates at their meeting this week, ending a long period of speculation as to the timing of a rate hike. Markets may continue their jitteriness in front of the Fed’s announcement, but based on history, a ¼ point hike is more likely to be a prescription of economic confidence than economic doom.

German economic sentiment is out later today, and we should see a jump to 15.

In 2008, when the Fed pulled out all of its monetary stops following the 2008 collapse, the move was created to stabilize the global financial system get the US economy back to a more “normal” footing. Driving the decision will likely be a falling United States unemployment rate, near a scant 5.4 percent, that is now regarded at “full employment” according to Henry’s analysis.

In a speech on December 2, 2015, Janet Yellen, the Federal Reserve chair, said that the FOMC (Federal Open Market Committee) is comfortable with economic conditions and that there is a possibility of moving toward a normalized interest rate. We’ve essentially been at zero percent short-term interest rates for seven or eight years. Whether additional increases are possible will be determined at subsequent Fed meetings.

The mechanics are complex, highly technical – and untested on a broad scale. No, not the new “Star Wars” movie: Fed week. “There is no obvious single “right” way to do it”. Such companies may also face the wrath of the market.

“You’ve got 33-year-old bond traders who’ve never in their career seen” the Fed raise its benchmark rate, said Bob Walters, chief economist at Quicken Loans, the largest non-bank mortgage originator.

Investors, however, believe those projections are too optimistic.

“Weaker growth in the emerging markets and easing tailwinds from the FX market will weigh on business sentiment”.

This gave the U.S. banks a lot of money to lend cheaply.

But the bar for changing course is unclear.

Media reports have depicted her working behind the scenes in recent months to build consensus behind a rate hike. In other words, there is some general dollar weakness, not just euro strength. True, the Fed also has to worry about expectations for future inflation, but as the figure below from economist Andy Levin shows, the expectations of professional forecasters have been drifting down, not up.

Markets sometimes react badly at the first Fed increase. Many people, like Hillary Clinton (SEE: Hillary Clinton comments on possible Federal Reserve rate hike) and several Fed officials, have come out in favor of a rate hike, and one of the latest is a Republican presidential candidate.

Yet even core inflation, which strips out volatile food and energy costs, has hovered below the central bank’s annual 2% target. They’d prefer for the Fed to signal that it foresees a slow and gradual series of rate hikes, one that would allow it to periodically assess whether the economy was sturdy enough to withstand higher rates. But exactly how long afterward is up for debate.

“They’ve been playing politics with it”, Christie said at a campaign stop at Merrimack in New Hampshire. This month alone, the Fed committed to reinvesting $21 billion.

The Fed is unlikely to lose control entirely, but how the process will unfold in these uncertain waters is an unknown. It has explicitly stated that it does not expect to sell its holdings of mortgage-backed securities.