December 16 is one important day. That is the day that the Fed (Federal Open Market Committee) will come out with the decision on whether they will be raising the Fed Funds rate .25%.
There are, of course, two possible outcomes:
- Raise rates .25% while providing some of the most dovish language in history or . . .
- Push it back until 2016 because of inflation, global slowdown fears and low commodity prices.
So what will happen?
Janet Yellen herself hinted at raising rates in an address to college students. She said:
“It will likely be appropriate to raise the target range of the federal-funds rate sometime later this year and to continue boosting short term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2% objective.”
Note two very important things in her comments . . .
- “Labor market improves” – Certainly it has! The unemployment rate is at 5.0% which is the lowest since April of 2008. Bernanke said they would consider moving rates higher at a 6.5% unemployment rate and we have passed that.
- “Inflation moves back to our 2% objective” – Here would be the sticking point. Inflation still hovers around zero and is showing now signs of real strength. Commodity prices are also, according to the CRB (Commodity Index), are sitting at the August lows. (see below)
If they do raise rates it signals that the economy is improving. If they don’t raise rates it signals the economy is not yet on solid footing.
While no one knows exactly what they will do, it’s fair to say that everyone should prepare for short term volatility in the markets. Short term traders will love it . . . long term traders SHOULD just shrug their shoulders and move on with life.
If you are an Iron Gate Global client . . . don’t worry. We have you covered.