Fed Huffing and Puffing

by David Chapman

Fed Huffing and Puffing

The Federal Reserve Building in Washington, D.C. The Fed is the central bank of the United States and sets monetary policy.

Over the past weeks a number of Fed officials, including Fed Chair Janet Yellen, have talked about an interest rate hike at the September FOMC that takes place on September 20-21, 2016. The interest rate decision comes out on September 21, and it will be a much-watched announcement. Stocks, bonds and precious metals markets all reacted negatively when the fourth Fed official (including Yellen) since August 2016 talked about a rate hike. Despite labour numbers that appear to point to decent economic growth and an inflation rate that hovers below the Fed’s target of 2%, the overall picture is not one of economic strength, with many indicators and numbers pointing downward.

By some calculations, the US has already entered a recession, but there appears to be a strong desire, at least by some Fed members, to hike interest rates to bring ‘normalcy’ to the markets. Nobody else is hiking interest rates, not the EU nor Japan, where both economies remain weak. There is less than two months to go before the election, one that has become increasingly controversial and volatile. For many, the expectation is that the Fed is trapped and can’t hike rates next week. Even Goldman Sachs has lowered the odds of a Fed hike. Moreover, the Fed Funds Rate is not exactly pricing in a hike. Will the Fed’s credibility be on the line if they don’t hike rates? Or is this really a lot of huffing and puffing, sowing discord and some volatility into markets in order to keep things in check? The decision comes next Wednesday.

Chapman looks at stocks, bonds, currencies, gold and other metals over the past week.


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