The Fed’s Interest Rate Hike Is Overdue

Asian stocks mostly rose Friday, perked by relief that the U.S. Federal Reserve held off on raising interest rates for the time being, but European markets faltered as some investors interpreted the Fed decision as a sign of economic weakness.


While U.S. growth has been strong, still-weak inflation and the recent China-driven turmoil in global markets “most likely mean that the FOMC will leave rates unchanged at this week´s meeting“, said Harm Bandholz of UniCredit.

The U.S. Federal Reserve has decided to keep interest rates steady, reaffirming its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.

“At end of the day, fundamentals will be a bigger deal than whether the Fed’s policy rate is 0% or a quarter-point higher”, Koesterich says.

In a statement, Fed officials stressed that they were “monitoring developments abroad” and that the global slowdown might restrain USA economic growth and inflation levels. There are no surprises there.

Fed chief Janet Yellen told a news conference: “A lot of our focus has been on risks around China, but not just China, emerging markets more generally and how they may spill over to the United States”.

Gold had been weighed down all year on uncertainty over when the Fed would hike interest rates from record-lows.

Some analysts said the Fed could still raise rates this year.

The policymaking committee has scheduled meetings for next month and December, and an initial move is possible at either meeting. Increase rates, and the amount of money it pays servicing the monster also grows.

Taken as a whole, the latest Fed projections of slower GDP growth, low unemployment and still low inflation suggest that concerns of a so-called secular stagnation may be taking root among Fedpolicymakers.

Investors are concerned with when the interest rate hike could come, as it will be the first in almost a decade following the Great Recession. In June, 15 Fed officials had predicted that the first rate hike would occur this year.

“Because the Fed has made clear that it intends to raise rates by year-end, the markets will eventually start bidding the dollar higher and we could see gold’s up move to be relatively short-lived”, he said.


In addition, the Fed’s preferred inflation measure is tracking just 0.3 percent annually, largely because of falling energy prices.

Federal Reserve Board Chairperson Janet Yellen answers questions at a news conference following a Federal Open Market Committee meeting. Pic  Getty Images  AFP