Ladies and gentlemen, this week it just might happen. Since I was a bushy-tailed freshman, I've been waiting for this day (kidding). After so many false starts, perhaps I'm blowing it up to be more than it really is ... or maybe not. The Federal Reserve may finally muster the nerve to hike interest rates following the FOMC meetings this week.
For the first time this decade, the overnight price of borrowing money might increase. Markets had priced in a summer 2015 rate hike since early 2014, as implied by Fed Funds futures, but after disappointed wage growth and dismal inflation this summer, Wall Street economists pushed back their expectations to September as consensus, with some (notably Goldman) pointing to December as the true lift off. But the question remains: why is everyone so obsessed with the timing (and 0.25% at that)? Algorithms have been written to trade on parsing FOMC minutes for the slightest hints from the Masters of the Universe. I'm not referring to the Giant Squid or Mother Merrill, but the non-governmental agency known as the Federal Reserve.
Even expectations or the slightest hint of a 25 basis point increase in funding costs, coupled with crippled manufacturing, exports, and GDP numbers from China have the entire world on the brink like its the Cuban Missile Crisis. Personally, I don't think it would be wise for the Fed to hike rates this meeting on account of the fact that inflation is far from target and deflation is a significant prospect even if rates remain as accommodative as suggested by the IMF. There is hope for wage growth on the horizon, granted, as cities like Los Angeles, Seattle, and now New York (thanks Cuomo!) have brought forth bills suggesting $15 or $20 per hour minimum wages. While that may be a welcome supplement to my intern salary, many small business owners are confused as whether to wish for a wage spike or a rate hike. Looks like either way, costs are going to increase soon enough.
While there is certainly a strong argument to be made that if rates do not rise soon, there will be limited weapons in the arsenal to incite financial stimulus should another recession befall world economies, the flip side is that the growth engine of America, small and medium enterprises (SMEs) may suffer. It seems the tail is wagging the dog.
Perhaps its best to trust the economists trained in the dark arts of behavioral economics, logistical ridge regression modeling, and proof-based mathematics to handle business and let us plebeians continue laboring as our capital contribution.