To hike, or not to hike, is the question…
If ever there was one topic on which the Fed seems to be incredibly divided; it is the subject of a Fed rate hike. As the Fed meets over the week end, the question is whether they will hike rates as promised. Or will the decision be put off till the volatility in global markets reduces?
Interestingly, the Fed itself is divided over the issue. After near zero rates for almost 7 years, the decision to hike rates is really a tough one. Here are the arguments that could go for and against the Fed rate decision.
Arguments for a rate hike…
The most obvious argument in favor of a rate hike is that zero rates have not really achieved much. Despite, the US keeping rates at near zero levels since 2008, the US has not seen any major spurt in growth. Agreed, the US is growing at 3.5% and looking good, but that is more because the EU, Japan and China are doing really badly. The experience of other countries like the EU and Japan has also been that near-zero rates have not really helped spur growth. Then, as well, hike rates now!
The other argument centers around the credibility of the Fed! For too long, the Fed has been hinting at a rate hike but not acting on it. Obviously, the delay is to accommodate the interests of the global economy and domestic business. A strong dollar may not be the answer.
Arguments against a rate hike…
Arguments against a rate hike have gotten louder after the recent slowdown in China and the consequent global turmoil. Influential voices like Ray Dalios of Bridgewater have spoken out against a rate hike at this point of time. According to Dalios, a rate hike in these turbulent times will force the Fed to negate its effects with another round of quantitative easing (QE).
The other argument is on the dollar-strength front. A rate hike will mean a strong dollar, which will be negative for US companies with global operations. Also a strong dollar will benefit China because China is already the largest exporter to the US.
What could the Fed do?
It is obviously a difficult decision. A rate hike will most likely add to the turmoil in the already turbulent markets. That is the last thing that fund managers and corporates will be looking for. It is obviously going to be a difficult choice!
Intuitively, the Fed has two models to consider. The first is the 1994 model where the Fed hiked rates 7 times in succession by 25 basis points each. The other model may be the 1997 model, wherein the Fed hiked rates once and did nothing for the next 18 months. The second model looks more likely. Also, it is likely to keep markets satiated! ©
Learn more about US Fed Rate Hike here.
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