Is the Fed rate hike a big mistake?

uh_oh.jpgThe FOMC is set to meet on December 15-16 and the market is finally buying the rhetoric that a rate lift off will begin this month. While Fed chair Janet Yellen has been hinting at a potential rate increase for much of the year, the financial markets are now pricing in the reality. Economists can argue whether it is the right or wrong decision, but the fact remains that the Fed is now highly likely to raise rates for the first time since June 2006. As you can see the 90 day T-bill rate is moving up sharply in anticipation.


Time for liftoff?

We have been writing for much of the year that the Fed shouldn't raise rates because inflation is near zero and growth isn't very strong. On the other hand, Yellen has essentially talked about a rate increase so much that she feels compelled to act. This could be a move that starts a new bear market because she will be the first Fed chair to raise rates into slowing growth and declining manufacturing data. The data dependent Fed seems to be ignoring some very important data.

Here is the Fed's GDPNow expectations. For the 4th quarter, the GDP forecast has crashed to just 1.4% growth. That is flat out ugly.


Furthermore, the US manufacturing data is also poor. In November, the PMI registered a weak 48.6. Anything below 50 is considered contracting and that was the first time the PMI was below 50 in 3 years. In the chart below, one can see that manufacturing has been slowing since the 4th quarter of 2014 and is now signalling a potential recession.

Looking forward to increasing rates

Regardless of this data, in recent days, Yellen and the Atlanta's Fed Dennis Lockhart have echoed statements that barring anything "drastic," the Fed is going to raise rates in December. On Wednesday, Yellen said that she was "looking forward" to a US interest rate rise that will be seen as a testament to the economy's recovery from recession. She expressed confidence in job growth and reaffirmed her view that inflation would moderate next year. Lockhart said that it would take a major negative turn of events to change his opinion that the Fed's extended stay at the zero lower bound should come to an end.

For investors, the result of a rate hike is a bit murky. One thing that one can guarantee is increased volatility. After Yellen's comments, the market sold off and that trend continued. The VIX which is referred to as the "investor fear gauge" shot up 14% on Thursday. Brace yourself for a bumpy road ahead. If 2016 plays out as we expect, recession is near and the Fed is likely making a big mistake by raising rates which would push us even faster into a slowdown.


Share This Story, Choose Your Platform!

About the Author: Chris Wang

Chris Wang


Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Runnymede Capital Management, Inc.-"Runnymede"), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Runnymede.  Please remember that if you are a Runnymede client, it remains your responsibility to advise Runnymede, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Runnymede is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Runnymede's current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: Runnymede does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Runnymede's web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Search Website

Annuity Review Database

Follow Our Podcast

Google Podcasts
Apple Podcasts

Recent Posts