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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Has The Federal Reserve Missed Its Chance To Increase Interest Rates

Interest-Rates / US Interest Rates Jul 14, 2015 - 01:41 PM GMT

By: AnyOption


The finance news space has been bombarded with so many different stories recently that many are starting to forget about one of the biggest stories in the space that we've seen throughout the year; the Federal Reserve. If you remember back to the beginning of the year, there were quite a bit of talks about a Federal Reserve interest rate hike that was to come in June, then it was September, and now, the story seems to have dissipated. Nonetheless, it's still a very important issue to follow; and more importantly, the landscape has changed quite a bit. So today, we'll talk about why Federal Reserve interest rates are so important, how the landscape has changed with regard to the topic, and why I think the Fed may have missed its chance to act. So, let's get right to it...

Why We Can't Forget About The Federal Reserve's Rate

The Federal Reserve's interest rate is currently at a record low of 0.25% and has been for years. The Fed reduced its rate to the record low in the depths of the worldwide economic crisis of 2008 and 2009 as a way to help stimulate economic growth in the United States. With lower interest rates, consumers spend less money to borrow money; leaving more money available for spending and economic growth. This has also largely fueled the bull market the US stocks have been enjoying. With consumers spending more, corporations earn more; ultimately exciting investors and causing growth in the market. However, the low rates weren't designed to last forever; and throughout the year, the Federal Reserve has been talking about when to increase them. This is incredibly important to any investor. When interest rates are increased, easy money leaves the market and investors will be forced to re-balance their portfolios.

However, The Landscape Has Changed Quite A Bit Throughout The Year

The Federal Reserve planned on increasing interest rates when the United States economy was strong enough to stand on its own; and in reality, that time has come, but may have passed. Lately, we've seen big changes in the economic landscape around the world. To name a few...

  • The Greek Debt Crisis – The Greek Debt Crisis has been the major story on finance news outlets for some time now. That's because while Greece is an incredibly strong country, the effects of its default reach far beyond its own country. As a matter of fact, this could lead to economic turmoil in Europe as a whole which is likely to bleed into the United States economy as well.
  • The Chinese Market Collapse – Lately, we've heard quite a bit about the Chinese market collapse and how margin loans in China have widened the effects of the crash. The 30% decline in China is another major issue that swept the world and led to uncertainty in the United States and abroad.
  • The Strong US Dollar – The strong United States dollar has lasted quite a bit longer than experts expected. In the face of economic concern around the world, it's now believed that the strong dollar is going to lead to relatively weak earnings reports this season; which is likely to cause pain for the US economy as well.
  • A Concerning Oil Landscape – Finally, the oil landscape is still very concerning. While oil is already trading incredibly low, it's likely to go even lower thanks to what seems like an inevitable nuclear deal in Iran which will send millions of barrels of oil back onto the market; further hampering growth with another supply glut. Since the United States economy is widely affected by the energy sector, this may be the nail in the coffin that puts a halt to any thoughts of interest rate increases by the Federal Reserve

Final Thoughts

All in all, the Federal Reserve had the ability to increase interest rates earlier in the year. However, today it would be incredibly surprising to see this happen. Unfortunately, the economic tides simply don't bode well. With all of the pressure the United States economy is feeling from major events around the world, I don't think it would be able to handle an interest rate hike as well. Although Yellen did say that the Greek Debt Crisis wouldn't stop an interest rate hike and that the Federal Reserve still plans to increase rates by the end of the year, I would argue that in combination with a strong dollar, weak oil, and economic and market uncertainty around the world, now simply isn't the time to add higher interest rates into the mix.

What Do You Think?

Do you think the Federal Reserve is likely to increase interest rates this year? Why or why not? Let us know in the comments below!

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