Will the Fed raise in December?

from CNBC

"Conventional wisdom says the Federal Reserve wants to telegraph clearly when it will raise interest rates for the first time in more than nine years in order to avoid market disruptions. But economist Steven Ricchiuto said Wednesday Fed Chair Janet Yellen actually wants to surprise markets.

So while consensus is forming around the notion that the Fed’s policymaking committee will raise rates in December, Ricchiuto said the central bank may hold off."

This adds an interesting level of game theory into the rate hike decision for market participcants to contemplate. What do you think?

She could always surprise the market by going 50bps.

While refraining from the initial rate hike any sooner than necessary, the Fed has been striving to be as transparent as possible for quite some time. No “surprises” are coming in December.


Why does Ricchuito think that the fed is trying to surprise the markets? I think ideally the fed wants the markets to slowly adjust (prices push downward) as it get closer to the decision and then when it’s finally made it won’t be as volatile as a “surprise” decision. One of the main goals of the fed is stability. The prices might go down even more but the drop wont be as crazy as the speculative rise if the fed decides not to raise rates.

If the feds raise the rates I could see sell offs happening and I think thats better than people buying and then a huge surprise drop in the future.

^ The Fed has no goal of stability. Target inflation and full employment. The Fed should not be concerned with equity valuations if the other two criteria demand action.

There is bank stability. The Fed has a bank regulatory function designed to ensure that the banking system can do basic functions smoothly. It’s not to hard to expand that into a more general economic stability, given that banks are exposed to most of the economy and economic instability can filter back to banks pretty readily.

Stability is not a blank cheque justification for economic intervention by the Fed, but it definitely factors in.

EDIT: agree that equity valuations should be a pretty minor consideration to fed decisions; I either didn’t see that comment above or it was added after I wrote this post.

The market currently sees a 77.5% chance of a 25 bp increase in December (it was 50/50 last month). I think some bad economic data could possibly delay the rate hike, but it seems all but certain at this point.





Friendly Tip for Matt:


In theory, yes; in practice, no.



No point in raising rates while there is still an output gap IMO.

It’s not like the rest of the world is attracting savings either.

The Fed will raise rates by 25bps, just to get insecurity out of the market, which is imo fully priced in. If the average economic and equity markets cycle persists, the central bank needs “ammunition” at the next downturn to support markets, which will be difficult in a zero-interest-environment…

ECB´s Draghi to announce expansion of asset purchases and another cut (of 10 - 20bps) in the deposit rate on Thursday.

The intial hike… it’s more symbolic than anything material to the market.

The fed will have an incredible difficult path going forward - the market could handle 25 - 50bp fed funds rate but anything above that seems highly questionable.

Hmm I question that. People are just tired of selling, it’s the holidays, and they haven’t really come to terms with the fact that it actually might happen. We will see in two weeks.

That doesn’t make much sense.

Having ‘ammunition’ is not a good reason to raise rates, because then you get in deeper trouble and it turns out that no ammunition is actually more ammunition than you have now.

In terms of financial markets, the first rate hike should be the strongest, but in real economic affect, it should be negligable.

I believe the equity markets WANT a fed rate hike in Dec at this point. The 25 bps hike will come soon enough. I think the more intriguing question will be when will the fed raise again after the first hike? The case can be made that the Fed should at the very least get off of a ZIRP. But lackluster inflation and questionable employment data really call in to question the trajectory of the sequential hikes. Inflation is good, not great. Employment is good, not great. A one time hike should not derail the markets by any means.

I think there is a good chance they will raise rates in December and the market will rally because everyone is so F’in tired of the uncertainty. Just do it or say definitively you are not going to do it ffs.

I think markets go down either way. They are in a bit of a corner with respect to equity markets.

Really? lol, I think they go up either way. If there is no rate hike, it’s game on for high beta trash stocks. If there is a hike, it signals the economy is not going over the falls and all stocks (esp financials obviously) will go up. I’m not a bull on this market but you can’t really say anyone would be surprised if they do finally raise rates a quarter point. I’m with zigs, I think the market wants a hike and has already discounted it.