Although analysts and investors are certain that a hike of the U.S. benchmark interest rate will occur in September, Fed officials do not point into that direction.
Plus a couple of months ago, the same people predicted an interest rate increase for June, but as the month came no such thing happened.
The issue of raising the federal funds rate is iffy in itself because it does not only affect the U.S. economy but it impacts the global markets as well. So it is hard to reach a consensus on a hike that happened nearly a decade ago.
While the major bond dealers that have ties with the Fed (Goldman Sachs and Morgan Stanley for instance) claim that the central bank would wait until late this year to make the move, others hope that the increase may happen sooner.
But in the meantime, the bets on the futures based on an interest rate hike are paused. And bankers are not more optimistic.
“We still have a September hike in the forecast, but the risks are clearly moving in the direction of a further delay in interest rate crawl-off,”
Deutsche Bank’s Joseph Lavorgna recently told investors.
The Fed cannot hike the interest rate at will because there needs to be some economic conditions to allow it and prevent disaster. For instance, unemployment and meager pay along with weak consumer sentiment does not benefit the U.S. economy. So, federal officials are concerned that an increase of the benchmark interest rate may make things even worse.
But earlier this month, Janet Yellen’s testimony before Congress pointed at an interest rate hike “at some point this year”. During her testimony Yellen said that the hike would take place as soon as the proper economic conditions are met.
Yellen also explained that the longer we wait the faster the Fed must increase rates. She said that raising them sooner may set the path toward a gradual increase of the rate. Plus this week, fed officials are expected to meet behind closed doors to discuss the issue.
Analysts believe that the fate of federal interest rate is tied to unemployment and inflation rather than to GDP and inflation. Yet the GDP can help us have a more comprehensive view on the current situation of the labor market. Jim O’Sullivan from the High Frequency Economics estimates that the strong results in GDP during the latest quarter should make a case for Fed’s move.
Image Source: Business Insider
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