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Is FED going to raise rates tomorrow?

Yellen

I have been a longtime proponent of an idea that FED will not raise rates at all although they have been talking about it for the entire year. They simply cannot afford doing it.

I always said that interest rates is a tool to cool the economy and prevent it from overheating. It is a tool to manage inflation. We do not have economy overheating. It is doing well, but not so spectacular so we need to slow it done. We do not have inflation (at least not the official one).

And I think, FED is well aware of it. If they raise rates tomorrow, they will derail the market, bond market will crash, and dollar will skyrocket.

A strong dollar will hurt our export even more and slow it down.

Higher rates will slow (if not stop) already tight lending, so the housing will slow down and all ARM mortgages will reset to higher rates which will have a negative impact to the lenders.

Higher rates will hurt housing market.

Car loans will stop too if the rates go higher. Today, consumers are buying new cars using low interest environment (rates) and yet many cannot afford it so they take out 6, 7 or I even saw 8 years long loans! When did this become a new normal?

Higher rates will slow car lending and car sales will go down too.

In my opinion, raising rates into slowing economy is foolish. Yet, Yellen may be foolish enough to do it.

People say, they have to raise rates otherwise they lose credibility. In my opinion, they lost the credibility several months ago. Raising rates now would be as damaging to the FED as not raising them at all.

Yellen always claimed that she was data dependent. If they raise rates now, she will prove that she never was data dependent as data coming in are tepid at most. ISM index has been slowing since 2012 and now is in recession level, consumer spending is non-existent, New York FED recently lowered their 4Q GDP expectations to 1.2% from 2.4% (what a surprise!) and employment data is nothing to celebrate about. We are seeing a seasonal increase in employment due to Christmas season (just review at the Department of Labor website what jobs made the data – all temporary jobs in service sector and retails). After the New Year we may see a slow down again.

Raising rates now would do the same damage (and bigger) than letting them at the same level. In short, FED is trapped.

Recently I received an email from one trader telling me what he thinks about FED and their rate hike rhetoric:

“At the end of the day, the Fed can talk all they want about how it is time to raise rates and start moving things back to normal.
But the truth is, the last thing they want to do is upset the apple cart.
Raising rates is for cooling down a hot economy and for fighting inflation. We have neither. Commodity prices are in a deflationary spiral, and a strong dollar would only add downside pressure to that group.
How can they suddenly appear hawkish without scaring the markets to death? Simple. They can’t. Whatever it is they do tomorrow, they will do it with an eye towards keeping the dollar in its current range, being friendly to stocks, and making sure the bond market doesn’t collapse.
I think everyone is looking for both bonds and stocks to collapse tomorrow. Which is why I think ultimately both of those markets will destroy shorts.”

We are also heading into election year. This is a big deal for Democrats. It is historically proven that every party tries to manipulate economy at the election year.
During 1962 – 1973 Federal spending increased by 29% during election year. Social security increased 100% higher compared to non-election years. Nixon pumped $1 billion a month into economy and pockets of unhappy voters, President Bush awarded federal grants to projects in strategically important states; tax cuts, drug benefits to seniors, military spending increasing the federal budget deficit by $477 billion in 2004 (Stock Trader’s Almanac 2016, p.28).


If you think, Obama administration will be doing otherwise, you are mistaken. Yellen is a Democrat. She will protect her party and she cannot afford markets collapsing and economy crumbling even more during election year. She needs a Democratic presidential hopeful wins the election if she wanted to be re-appointed to continue as a chair if the FED.

Whenever Yellen (or any other of the FED’s members) tests waters and releases a blah about a “strong possibility of raising rates” at the next FOMC meeting, markets tank heavily. This has been happening for the entire half of 2015 year. I believe, that this is what scares FED members and at the end they back off.

I think, FED will continue their talks but they will keep rates at the same level tomorrow. If they, however, raise it, it will be a small raise and they will be forced to lower the rates again next year.

What do you think? Will Yellen move forward and raise rates because everybody expects it or stay the course because economy is not ready for the hike?
 





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