Newswise — The Federal Reserve could raise interest rates in December or early 2016, which would be the first rate hike in many years. Steven C. Kyle, an economics professor at Cornell’s Dyson School of Applied Economics and Management, says that while the Fed has reasons not to change interest rates, the mounting expectation of a raise might already be priced into the market.
Kyle says:
“The immediate impact of a Fed rate rise will be somewhat limited since it is extremely unlikely that they would raise rates by more than 0.25 percent or that they would continue tightening very quickly in any case. Indeed, given the widespread expectation that a rate increase is in the offing either in December or sometime soon in 2016 there is reason to believe that such an increase is already priced into the market. However, a switch to a tightening trend would be a major departure from the policy that has been in place for the past five years. Even though the Fed can reverse itself whenever it likes, the perception that they are leaning toward rate increases would have an effect on markets and the economy overall. “There is no question that a federal funds rate of near zero percent is not ‘normal,’ but the Fed has continued this policy since the 2008-2009 financial crisis in fear that a higher rate would tip the economy back into recession. The complete absence of inflation has so far eliminated the one key reason to start raising rates again.
“While inflation has remained below the Fed’s target rate of 2 percent, wage growth has perked up in the latest numbers. The 2.5 percent year on year rate just posted will enable the Fed to raise rates if they are looking for a reason to do it. Much will depend on the data they see between now and then, but most observers expect a rate increase if job numbers continue to show strength. “And yet, inflation data might support those opposing a rate increase. Though wage increases have risen above 2 percent, overall inflation has not. Some might also argue that it would be premature to react too quickly to an increase in wages because an increase in consumer purchasing power is key to continued growth given the overall weakness of aggregate demand.”
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