Will December’s Fed Meeting Bring a Rate Hike?

The Market Gage - Dillon Gage's Precious Metals Newsletter

A lot of discussion is taking place regarding the possibility of an interest rate hike in the near future. Here is what I expect will happen on the next Fed Rate hike.

When the Fed increases rates, and I anticipate they will, I expect it will have an immediate impact on the price of gold, silver and equities, causing them to decline. A rate hike will also have a direct effect on the banks who borrow money from the Fed. Consumers will see increases in mortgage rates and credit card interest rates and banks will begin to charge consumers and corporations a higher rate to borrow money.

If you ask me, with a struggling economy, does raising rates sound like a good plan? What do you think the Fed is trying to accomplish by raising rates as they look out the window over the pond and see negative interest rates popping up all over the globe?

It seems to me that when banks make business loans more expensive, especially in an economic slowdown, companies will have to pay higher rates and they will in turn put off any expansion. This will further slow the economy. With higher rates, consumers will have less discretionary income which would also contribute to a slowing economy.

For the equity investor, rising interest rates will put pressure on their individual stock holdings and have the potential to affect future earnings.

It seems many of the talking heads in the media along with a few hawkish Fed Presidents are putting pressure on Chairwoman Yellen to raise rates in December.

What do they know that they are not telling us?

All a rate hike will do is lessen the amount of money in circulation, which in turn will keep inflation below their target rate. It also makes borrowing more expensive which effects how consumers and corporations spend money.

I just don’t get it.

First quarter gross domestic product (GDP) came in at 0.8 percent and the second quarter was a little better at 1.4 percent. The next GDP release will be on October 28.

I expect this will be a very important number, helping to decide what the Fed will do in December. No one sees any change taking place at the November Fed meeting according to the CME Watch tool which has the probably of a rate hike sitting at 7 percent. Whereas the probability of a Fed rate hike in December currently is at 69 percent.

So does anyone think the Fed will get it right if they raise rates in December?

Some critics say the Fed missed its opportunity to raise rates in June after the strong jobs number. Others argue that the Fed had no reason to raise rates last December for the first time in ten years.

We keep hearing from the Fed Chair that future rate hikes will be data dependent.

If I could transform myself into a fly on the wall at the next Fed meeting, I’m confident I would witness a few heated exchanges between some participants. I expect would hear something like this from the doves in the room: “Let’s not forget folks we do have a dual mandate: maximum employment and price stability.”

So, how are we doing in those two categories? The latest figures show total nonfarm payroll in September increased by 156,000, less than expected from some economists, while the unemployment rate remained unchanged at 5 percent. So the doves have an argument to keep rates unchanged.

Then the hawks would argue that we must be able to predict future growth in the economy. So as we witnessed at some points during the year, we had good job numbers, and GDP picked up a bit. I can imagine the hawks saying, “Let’s be the leader once again in the world and show everyone we are ahead of the curve.”

At this point, if I were still that fly, I would be yelling, “Where’s the data? Where’s the data to justify a rate increase? Don’t make the same mistake you did last December!” (Sadly, they wouldn’t be able to hear me.)

So, all we can do is wait and see which direction the Fed will go in the coming months. One thing I believe is that it will provide some interesting topics for discussion.

Have a wonderful Friday.

Disclaimer: This editorial has been prepared by Walter Pehowich of Dillon Gage Metals. This document is for information and thought-provoking purposes only and does not purport to predict or forecast actual results. It is not, and should not be regarded as investment advice or as a recommendation regarding any particular security, commodity or course of action. Opinions expressed herein are current opinions as of the date appearing in this editorial only and are subject to change without notice and cannot be attributable to Dillon Gage. Reasonable people may disagree about the opinions expressed herein. In the event any of the assumptions used herein do not come to fruition, results are likely to vary substantially. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate its ability to invest for a long term especially during periods of a market downturn. No part of this editorial may be reproduced in any manner, in whole or in part, without the prior written permission of Dillon Gage Metals. This information is provided with the understanding that with respect to the opinions provided herein, that you will make your own independent decision with respect to any course of action in connection herewith and as to whether such course of action is appropriate or proper based on your own judgment, and that you are capable of understanding and assessing the merits of a course of action. You may not rely on the statements contained herein. Dillon Gage Metals shall not have any liability for any damages of any kind whatsoever relating to this editorial. You should consult your advisors with respect to these areas. By posting this editorial, you acknowledge, understand and accept this disclaimer.