The only thing on investors’ minds today is: what will the Fed decide? The reports I hear are that there may be some disagreement within the committee.
Communication from Fed chair Janet Yellen has been pretty clear. They plan to hike the federal funds rate from zero to 0.25% before the end of the year.
Although Janet Yellen has been adamant about a hike, other voting members aren’t so sure. Plus, outside forces like the IMF and the People’s Bank of China are pressuring them NOT to raise rates.
Economic data is still too poor to really justify a hike, but there have been some recent victories. Last Friday, the Bureau of Labor Statistics (BLS) released August producer prices (PPI), and prices on the wholesale level rose more than expected. That’s the third increase in prices in a row. It’s still lower than the Fed would like to see, but certainly gives them more reason to hike.
But guess what? Long-term Treasury bond yields were recently dropping! If the Fed does increase rates today, raising short-term yields while the long-term continues lower, it will flatten the yield curve even more – and maybe even invert it!
If the market responds like that, it will mean the Fed made a big mistake in hiking. Worse, we could be looking at a possible recession. If a small hike in rates slowed our economy and slowed employment, it would certainly slow inflation – again. That would be an unintended consequence of Fed action to move rates higher.
Let me just say this – I don’t think the Fed’s going to do it. The organization doesn’t have the internrnal consensus to get away with it. But the buildup in anxiety leading up to their decision could cause a lot of trouble either way.
Editor, Dent Digest Trader