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October 10, 2016

Tired of Playing Fed and Mouse? Janet Yellen to the Rescue

Many brokers, WMoption included, have wondered whether the U.S. Federal Reserve is going to increase its interest rate yet again, and only one person seems to know the answer. Her name is Janet Yellen, the Chairperson of Fed.  

The D-day

As of late, there have been some confusing signals arriving from the U.S. Federal Reserve, which did not bode well for neither the brokers nor their clients. In fact, nobody was getting anywhere, and as a result, central bankers from major countries are scheduled to meet next Thursday. The meeting will take place in a remote location in the mountains of Jackson Hole in Wyoming, USA. The next day will most likely be marked by the official speech from Janet Yellen herself. This should at the very least shed some light o new developments and give the analysts something to work with.

So far, there have been good and bad news. First, there were some strong U.S. employment readings, which should mean the Fed rates could and in fact should increase by next month, and yet no such action has been announced to date, which puts some doubt in the air regarding the economic outlook for the near future. Hopefully, if there is to be an increase in rates in the next month or so, this meeting would be the perfect opportunity to announce it.

However, there is also a reason why the rate has not been set higher already, or at least why any such measure has yet to be announced. The most likely reason is that there is a strong disagreement among the opinion makers inside the Fed regarding this issue. Some would have increased the rates already if it were up to them, while many others prefer to make this decision from a far more informed position and insist that further data on the state of the economy is a must before any such decision is made.

And it is not like they do not have a point: sure, the employment readings are good, but without knowing the pace of hiring, it is hard and risky to make an informed decision regarding the Fed policy. Furthermore, if a hike is truly warranted, how much should it be? This and many other decisions have yet to be made, and the pending meeting is most likely where some of the final verdicts will be made, or at the very least announced.

Our Best Guess 

If we had to put our money on it, our best guess would be that Janet Yellen is going to announce an increase in the rate, albeit at a very slow and controlled pace. Also, it should not come as a surprise if she comes out with an assessment of what job and economic growth might be in the near future, along with other factors such as the inflation rate. In the slightly less likely scenario where no hike is announced, such data would at least enable a more accurate assessment on when it might come to pass.

Of course, we haven't seen the Fed interest rates increase since last December, and even then it was hailed as a miracle that it was even achieved – many thought it to be far beyond the scope of Fed's possibilities. However, further interest rates have been postponed due to various events from all around the world which have pretty much stunted the growth of some of the largest economies in the world. Indeed, it is no small feat to overturn the U.S. inflation rate by outside factors. Then again, this uncertainty has not done the U.S. dollar any good, as it keeps weakening against the Euro, albeit at a controllable pace.

The Final Verdict 

We did not predict a slight increase in interest rates out of the blue – there are plenty of economic factors and data to support such a development. The broad progress in the overall economy in the U.S. is a real thing, and it should be backed by other readings soon enough. Next Tuesday and Wednesday should see announcements on how new home sales have been doing last month, alongside existing home sales and house prices. And the numbers are likely to be good. These and the PMI should serve as an early indicator on whether the economy is ready for another interest rate hike – unless oil prices kill that prospect, of course.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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