are we in a bear market
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should the fed raise interest rates ?
The questions that our => MEMBERS HERE, keep asking us is ' should the fed raise interest rates ' or should the fed raise interest rates in 2016?
The Federal Reserve sent out new signals that officials will raise interest rates in December as long as job growth and inflation trends don’t take a turn for the worse.
Most officials meeting last month anticipated that December “could well be” the time to lift short-term rates after leaving them near zero for seven years, according to minutes of their last meeting three weeks ago, released Wednesday.
Any rate increase would be expected, well telegraphed, and signal a more positive Fed view on the economy. Early rate increases have historically been good for the market, and we would expect that to continue. I guess when you look back in history that has always occur, but past results are not indicative of future results, but we must take this into account.
Officials changed the wording of their policy statement at the October meeting—adding a reference to the possibility of a December increase—to ensure their options were open. The Fed has been waiting to see further improvement in the job market and to gain confidence that inflation, which is running below its 2% target, will start moving up.
“Most participants anticipated that, based on their assessment of the current economic situation and their outlook for economic activity, the labor market, and inflation, these conditions could well be met by the time of the next meeting,” the October meeting minutes said.
Since the Fed’s October gathering, economic data have generally supported the central bank’s view that the job market is improving and offered some evidence wage and inflation pressures are slowly and gradually starting to build.
The U.S. central bank has now warned about rate increases so many times that investors appear to be getting used to the idea. Raising the cost of borrowing typically sends stock prices tumbling, but stocks rose Wednesday, a sign that a rate increase is already priced into markets.
The Dow Jones Industrial Average rose 247.66 points, or 1.4%, to 17737.16 Wednesday, registering its biggest move up after the Fed’s announcement at 2 p.m. Eastern time. Investors appear to have been comforted by Fed officials’ assurances they are likely to proceed slowly and cautiously after the first move, a message they amplified in the latest release of minutes by detailing discussions about the exceptionally low long-run outlook for rates.
The markets are rallying over the idea that they are not going to be raising rates very fast, so some traders minds have been put at ease, and SENTIMENT TRADER does like that. The funny thing is that rates are basically as low as they have ever been, so it is inevitable, that rates will have to rise soon. There are no two ways about it. If you do not believe that, we have included a chart below that depicts what interest rates have done for the last 60 years. The chart is particularly interesting.......
You can see below on the chart, below, which is pretty interesting. You can see the rapid inflation and skyrocketing interest rates back in the 1980's. Since then, we have not been this low since the 1950's. So as you can guess I seriously doubt interest rates can go lower than where they are. There is only one way for interest rates to go, and that way is UP!
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| should the fed raise interest rates |
And wouldn't you know it, plenty of stock uncertainty is in the mix. Already, choppy global stock trade colors the week that puts the U.S. Fed—and its hand-wringing interest rate decision—smack in the spotlight.
Last week, the broad-based S&P 500 (SPX) logged a 2% gain while the blue-chip Dow Jones Industrial Average ($DJI) rose 2.1%. It was a solid performance considering that higher Fed rates have implications for global profits, business borrowing costs, housing markets, and the relationship between fixed income and equity investments.
Which Way Will They Go?
As recently as early August, the Fed funds futures market was pricing in a better-than-50% chance that the first Federal Reserve interest rate hike since 2006 would come in September. Then, a spate of worrisome Chinese economic data and subsequent stock rout, a washout in global commodities prices, and other factors likely fueled a Fed policy rethink. As this week kicks off, Fed funds futures odds for a September rate hike stand at about 26%.
Predictions are mixed among industry economists, too. A slight majority has said it expects the Fed to hold off, but quite a few consider the decision a complete toss-up. Former Treasury Secretary Lawrence Summers has been a notable voice against a hike just now. But remember, the latest employment report included an unexpected drop in the jobless rate to 5.1% with relatively healthy job growth. The government also nudged up Q2 GDP growth in a revision, now at 3.7%. Inflation? Not a real problem yet.
All told, the global interest-rate differential will keep currency markets under watch. Dollar strength is likely to continue to factor in the U.S. earnings picture, hurting multinational profits.
VIX MOVES NARROWING.
The CBOE Volatility Index (VIX), the market’s “fear gauge,” has slipped below 25 as the broader stock market has steadied. VIX is logging smaller intra-day moves in recent sessions.
Commodities Are a Factor
It could be interesting to see how much lip service the Fed gives to the global commodities retreat. Europe-traded Brent and U.S.-traded West Texas Intermediate (WTI) have declined in 9 of the past 11 weeks.
What’s more, a handful of banks have joined Goldman Sachs in pushing down their crude price expectations. Among them, Jefferies lowered its 2015 forecast on Brent oil by 9% to $54 per barrel and by 10% for the 2016 forecast of $61 per barrel.
Behind the scenes of the October meeting
The meeting minutes indicate that, "Some participants thought that the conditions for beginning the policy normalization process had already been met" in October. "Normalization" is Fed-speak for raising benchmark interest rates from record-low levels.
Even more telling, the document says, "Most participants anticipated that, based on their assessment of the current economic situation and their outlook for economic activity, the labor market, and inflation, these conditions (for a rate hike) could well be met by the time of the next meeting" in December.
Federal Reserve Bank of Richmond President Jeffrey Lacker told CNBC that he still believes the central bank should hike rates. He dissented from the group in October because he wanted to raise rates then.
Rob Kaplan, the new president of the Dallas Fed, says it's time to move away from zero interest-rate policy. The benchmark federal funds rate has been parked at between 0% and 0.25% for years.
Federal Reserve Bank of Cleveland President Loretta Mester was quoted telling a New York panel that she believes the U.S. economy can "handle" a quarter-point rate boost in December.
Since the October meeting …
A whirlwind of events has occurred since the Fed last met. The world was shaken by the deadly terror attacks Friday in Paris and ensuing heightened tensions. There’s no indication, however, that the seemingly modest economic impact will compel the Fed to delay a rate boost.
Indeed, the Richmond Fed's Lacker has said, "We've been through episodes like this before in which some disruption of a certain geopolitical or military nature affects things. For a time, people can get cautious and pull back a little bit. These tend to be transitory."
Earlier this month, the Labor Department reported that employers added 271,000 jobs in October, substantially more than expected. Wage growth, or average hourly earnings, was reported to have accelerated, up 2.5% over the past year. There's one more jobs report due for release before the Fed's last scheduled meeting of the year, Dec. 15-16.
Stocks holding up
The stock market has appeared to embrace the seemingly growing possibility of a rate hike. The major stock averages remained in positive territory after release of the hawkish October minutes on Wednesday. SENTIMENT TRADER do find this interesting and we believe stocks could see higher prices no matter what the fed does, of course we can be wrong, so we will see what happens.
It is a real shame that we hear people crying out on the street that the market is about to crash. Sure there are some problems, and some risk associated with a low rate environment. But then again, what you must know is that when interest rates have cycled from a low rate environment and start lifting it has presented some very nice trading conditions, and furthermore has been a period where professional traders and institutes have been able to spot 300% more opportunities. So there is no reason to be all BEARISH, and ALL PESSIMISTIC here.
Also you must remember that the FED have basically painted themselves into a corner now, which means, they have left rates too low, for far too long, and that means that they cannot raise rates to quickly or it will mean death to the stock market, and they have already warned us that that is not what they are going to do. So if they do start lifting rates slowly, its going to make trading conditions favorable, and leave us with lots of vehicles to trade. If you look back over the last 40-50 years, any time the fed has raised rates slowly from the all time lows, it means there was lots of opportunities both short term and long term. We can already see the beginning signs of that, as many large funds and institutes are starting to slow sniff and get excited about YIELDS and some of the FINANCIAL sectors. Because if you are unaware, these sectors normally do particularly well, as rates start to rise. But we talk more about that in our FULL REPORTS below.
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