Well, the Fed went ahead and did it. For the first time since the financial crisis, the nation’s central bank hiked up key interest rates. Investors largely cheered the move, because by raising rates the Fed is acknowledging that the economy is stabilizing. In this Friday’s blog post, I’ll explain why this is partly true: Consumer spending and the housing recovery are driving the economy, while manufacturing is still near recession levels.
As a result, it was a minor hike; the Fed raised the benchmark interest rate by 25 basis points to a range of 0.25% to 0.5%. If you remember back to my coverage of the last FOMC meeting, my prediction was that the Fed would do just that, but that it would be a one-and-done deal. And given how “dovish” Janet Yellen’s comments were during her press conference, I would be surprised if the Fed raised rates again in 2016.
The fact is that while the U.S. economy continues to be an oasis amidst the global slowdown, the Fed’s hands are tied. That’s because interest rates around the world remain at rock bottom levels. A few weeks ago, the European Central Bank cut its deposit rate by 0.1% to -0.3%, and it extended its asset buying program.
Fixed income investors in Europe certainly weren’t happy about this, so they’ve been chasing yields in the U.S. The divergent policies of major central banks are effectively insuring that the U.S. dollar will remain strong. And as the U.S. dollar has remained strong, commodity prices have been plunging.
Any additional U.S. rate hikes would only create more deflationary pressure and further imbalance the global financial markets. It would also hurt the already week manufacturing sector, which is already suffering from anemic growth. For these reasons, I still believe that today’s rate hike was a “one and done” deal and that we won’t see additional rate hikes in 2016.