Interest Rate Hikes: Will They Or Won’t They?

When the Fed wrapped up their meeting last Wednesday, it was interesting to hear analysts conclude that a rate hike was out of the question for the June meeting and not likely for the rest of 2015.

It’s also interesting to note that the Fed statement from last week was the shortest in two and a half years. Apparently they’re not worried about the disappointing GDP growth from the first quarter — which they, like many things, consider “transitory.”

The same goes for wage growth and low inflation. Transitory, temporary, or maybe just a fluke!

What’s led many analysts to believe that the Fed won’t raise rates anytime soon is the fact that the Fed removed any wording giving clues to the next rate hike. In other words, they didn’t say the hike could come as soon as June (their next meeting)… but they didn’t not say it, either!

In last Friday’s Dent Digest, Rodney mentioned that he believes the Fed will hike rates in June after the next meeting, though Harry doubts whether we”ll even see one in 2015. Like Rodney, I also think it’s likely the Fed will test the waters with a small hike in June. But we’re all of the opinion that when a rate hike comes, it won’t be substantial.

Market participants seem to be leaning in the June direction as well, since a sell-off in Treasury bonds is pricing in a rate hike already.

But aside from the Fed, there are other factors that move interest rates. One factor is looking at what is happening overseas. The German 10 Year Bond or “Bund” has moved up from 0.12% to 0.36%. Other European and Asian bonds have also moved significantly higher over the last couple weeks.

I interpret the brief Fed statement to mean that their position has not changed. The Fed still looks at the recent weakness in GDP, employment and even inflation as temporary — or in their word, transitory.

Maybe analysts were correct interpreting the Fed last week. Maybe Rodney and I are right to expect a small rate hike in June.

Or maybe — and this might be the big picture — the Fed simply doesn’t matter. Perhaps market participants will dictate long-term interest rates regardless of what the Fed does or doesn’t do.

Whatever happens, I’ll be keeping an eye on the marginal moves in interest rates as market participants decide for themselves what the Fed will or won’t do. You can join in on the action by following Dent Digest Trader.

Lance Gaitan