June Fed Meeting – To Raise or Not To Raise

This article is from 2016.

The Federal Reserve is doing its best to alert investors (and others) that it plans to raise interest rates in June (2016). You know, unless something happens in China again, or whatever.

Once upon a time, the Fed kept its thinking about interest rates to itself. These days, Federal Reserve Board members talk to anyone who will listen about how they are currently leaning toward whether or not to raise interest rates.

While there is still virtually no inflation anywhere in the economy, the Fed got an excuse to raise rates from the April inflation numbers which showed a fairly high 0.4 percent seasonally adjust increase. Of course, every economist and analyst within a thousand miles quickly noted that virtually all of that increase came from fuel prices finally bouncing off of rock bottom, and not from any real inflation.

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Still, the Fed seems intent on raising interest rates for some reason, most likely in order to keep from being considered too dovish, since we are still throwing that word around like an insult.

Should The Fed Raise Interest Rates in June?

The Federal Reserve has two official mandates, to keep inflation in check, and to keep employment as close to full employment as possible. This begs the question of why, exactly, the Fed seems so keen on raising rates right away. Employment is doing better, but nowhere near full, and wage growth is stagnant, so no issues there. The twelve month inflation rate, even with April’s increase, is just 1.1 percent, well short of the Fed’s supposed 2.0 percent inflation target.

What causes inflation?

The reality is that the Fed sees 2.0 percent as a catastrophic ceiling, not an actual target. Thus, it’s actual goal is to keep inflation from coming anywhere near 2.0 percent (while still being able to claim victory if it does tick up near 2% inflation).

dollar coins inflation

So, the Fed really, really wants to raise interest rates, and now may be its only chance, because the U.S. economy is still very fragile, and most world economies are nowhere near growing even that strongly. In other words, the Fed knows that it really shouldn’t be raising interest rates, but it wants to for appearance sake.

The result is a market that is completely unimpressed by the Fed statements coming faster and louder about a June increase.

The two-year Treasury auction had very strong demand, which is odd if you “know” interest rates are going up in June. While some pension funds and life insurance companies always need to buy Treasuries, only 17% of the auction fell through to dealer banks, which is one of the smallest percentages ever for a 2-year auction.

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What does this mean? It means that the market actually thinks that the Fed either won’t raise rates in June, or it thinks that the increase will be too early and the markets will correct it away. Either way, if the Fed raises in June, you can forget all the talk about multiple increases between now and the end of the year. The strength simply isn’t there in the economy, and pumping the brakes this early will make that abundantly clear in subsequent economic numbers.

For now, long-term investors should stay the course. Even bond investors have little reason to be worried at this point.

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This is not a recommendation to buy or sell securities. This article if for informational purposes only and is not meant as investing advice, financial advice, or for financial planning. See your tax or investing professional for advice specific to your situation. 

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