With two Fed meetings impending this summer, everyone who works in economics is watching closely. Interest rates were raised last December for the first time since the recent recession began, and the Federal Reserve chair, Janet Yellen promised more hikes over the course of 2016.
Original estimates suggested that 4 hikes of 0.25 percent each would be spread across the year, but so far none have occurred. This leaves everyone wondering if the Fed is abandoning its earlier plan in the face of a weaker economy than was projected or if accelerated hikes are waiting around the corner.
The Case to Raise
There are a number of factors that could lead to a raise this summer. The strongest argument in favor of a raise is that the promised hikes need to start soon if they’re going to happen at all.
Clearly the goal is to raise rates, but fear of killing economic momentum has stalled the Fed so far this year. Here are the major positives that could justify a raise this summer:
- Retail Growth. This first half of the year has seen actual positive growth for retail across the country. Seasonally adjusted numbers show a 3.2 percent gain, with a real growth of 1.44 percent. Considering how many U.S. jobs are tied to retail, this is very positive news.
- The international oil market bottomed over the last 12 months, but it seems to be rebounding. This increases capital and spending across the board, contributing to sustained growth. While the average consumer may have enjoyed lower oil prices, the steady recovery is grounds to support an interest hike.
- Unemployment numbers hit 30 year lows. This argument loses strength when considering seasonal adjustments and other factors distort the actual numbers, but the rate is low and still steadily dropping. This has been one of the leading justifications for the recent hike, and it will continue to support interest hikes as long as the numbers remain low.
- GDP. Enormous GDP growth in 2015 was the quintessential justification for the hike in December. First quarter growth in 2016 is the highest seen in several years. The first quarter is traditionally the lowest for GDP by huge margins, so the 0.8 increase of 2016 was not enough to generate the confidence the Fed needed for a hike during that period. If estimates and trends fall in line, this summer will see big growth and very likely enable the Fed to push for the first of its expected increases this year.The Case Against a Hike
While those signs point to a strengthening economy and support the idea of raising interest rates, there are also many negatives to the current economic outlook. Overall, things are not as stable or promising as anyone would like them to be, so there is still a strong case against the hike.
Many of the pros just listed can also be construed as cons. To break things down, this is the list of major factors that could prevent the impending increase:
- Wall Street. Wall Street has struggled so far this year. Some argue that an increase would help banks and solve issues, but it’s more likely that an increase will discourage investing and borrowing. If economic growth can’t stand a minor 0.25 percent rate hike, then the Fed needs to rethink them.
- May Job Report. Last month’s report saw a huge drop in job growth. While unemployment still technically shrunk, the sharp decline in job production was eye opening. Many economists are scared by the volatility of job creation, and more interest would likely hamper further creation.
- Oil. Oil has been recovering, but it is still low. Most experts anticipate a slow recovery for the market, which could be strong incentive for the Fed to continue delaying the hikes.
- China. The Yuan is collapsing and China is on the verge of implosion. Their huge stake in the USD is likely going to cause it to gain value in international markets. This already increases the value of existing debt. A Fed hike on top of that is very threatening.Economists are split on whether the economy can handle an increase this summer, and they are equally split on whether or not that hike will happen. Ultimately, it is in the hands of the committee, so any prediction has to be taken with a grain of salt.
Considering all of these factors, the job scare in May and the collapse of the Yuan are likely to prevent rates from going up in June. If job growth rebounds, though, you can expect a hike in July. Either way higher interest rates are on their way at some point in 2016, it’s just a question of how soon. Our prediction is before the end of summer.
Regards,
Ethan Warrick
Editor
Wealth Authority
