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Here's why the Federal Reserve should resist a rate hike

US Personal Consumption Expenditure has increased by 1.2% in August against the central bank’s target — of 2% a hint that prices could take some time to pick up.

Sep 16, 2015, 10.29 AM IST
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ET INTELLIGENCE GROUP: With less than 36 hours to go for the Fed meeting on September 17, there are conflicting views on what the world’s most powerful monetary authority could do. Ray Dalio, founder of Bridgewater Associates, a hedge fund manager, says that any hike in interest rates in September would be an epic blunder, while on the other hand, William Lee, a Citigroup economist, on an optimistic note, explains economic growth is healthy enough to absorb a rate hike. Are markets in for a rude shock? Or have they priced in a hike? Here’s a snapshot of the arguments and data points that resist a rate hike this week:

Goldman Index

The Goldman Sachs Financial Conditions Index, which is based on variables such as stock prices, credit spreads, interest rates, and exchange rate, has reached a five-year peak. This means that security prices have already moved anticipating a hike. Thus, markets, in a way, has done Fed’s job – leaving the US central bank room to postpone its decision till December. Chicago Fed’s National Financial Condition Index has also reached its highest point since November 2012 – an indication that boost through easy money is beginning to fade.

A Stronger Dollar

Currencies of countries like China, Mexico and Canada, which are closely tracked by the US in the basket of 26 currencies, have weakened significantly. So, it becomes tougher for the Fed to raise interest rate which would further strengthen the dollar.

Low Inflation

US Personal Consumption Expenditure has increased by 1.2% in August against the central bank’s target — of 2% a hint that prices could take some time to pick up.


Here's why the Federal Reserve should resist a rate hike


Dip in Probability

According to Bloomberg’s calculation, the probability of first interest hike this September has dropped to 30% on September 15 from 54% in the beginning of August.

Fragile markets

Global market capitalisation has shrunk $11.71 trillion of since mid-June and absolute marketcap is down to its lowest since October 2014. This fall is equivalent to China’s total market capitalisation before the recent fall.

More Meetings

The Fed panel that takes the key rate call will meet once again in October and December. So, there’s still time given that job market data is not convincing. Also, there had been conflicting functionaries.
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