Why I think that the Fed has backed itself in a corner

Hello peeps!

Looking at how in December 2015 the Fed was forecasting

hiking by a further 100 basis points through 2016

(Fed to Raise Interest Rates Again in March, Follow Up With Fewer Hikes)

and how there has been no rate hike yet this year, I look forward and see

how there are only three rate decisions left to the end of the year:


This would imply two 50-point (or 0.50%) hikes either in a row or at alternate meetings,

which would go against the Fed’s insistence on rate changes being ‘gradual’; what is more,

the November rate decision (Wed. 2nd) will coincide this year with a USA presidential election

(Tue. 8th): looking at the last quarter of a century of presidential elections and checking the

rate changes made by the Federal Reserve in those years, you can see that it was never done

in November except once. Here is a screenshot from the document that I created:


What all this boils down to is the following:

we had no change this month, and there will be no meeting next month (August); with November

historically a no-go area when presidential elections take place, this leaves only September and

December to raise rates by 100 basis points; given that this would be the antithesis of gradual,

let us assume 50 basis points: however, December rate changes are not the best bet, because the

end of the year is also historically not a popular choice, with the Fed only raising rates in that month

only nine times since 1990 (granted, in 1990 and 1991 there were two December changes each time,

so technically we are talking eleven changes; also, there were no changes at all between Dec. 2008

and Dec. 2015, so we should say that there were eleven rate changes in December months in the last

(25 - 7=) 18 years).

This would only leave September, which is also when a growth forecast update and a full press

conference from the Chair (Yellen) are given, to deliver one more rate hike since Dec. 2015:

what size will that rate hike take? If 0.25% (25 basis points), then this would still leave the Fed’s

rate below 1% since the completion of ‘The Taper’ nearly two years ago

(http://www.cnbc.com/2014/10/29/fed-completes-the-taper.html).

The Fed Funds Futures see an 82% chance of a 25-50 basis points hike in September

(Countdown to FOMC - CME Group) :


What are your thoughts on this?

Discuss.

(I am off to bed haha)

Happy Trading

good thread francis!

the american economy is running very stable. the main reason why there were no bigger hikes in interest is that a lot of energing economies have big borrowings in dollar. if the usd goes up it slows the growth of these emergin markets and endangers world wide growth.

the worlds growth is rather fragile at the moment and the usd is very strong since 2010. a stronger usd would do more damage which the fed wants to avoid at the moment.

i aswell gave it a lot of thoughts as in my opinion the fed should have started a rate hike in 2014 already and it was not clear to me why they did not. economical fundamentals are very strong in USA and about 6 months ago i realized its the above mentioned reason.

another reason is a strong competition between EURO and USD (as the global currency number 1) as the emerging markets started a strong borrowing in EURO since the euro lost in value and thereby giving more economical and political power to brussels and draging it away from washington. of course the USD is still the global currency but it is shifting swiftly. 10 years ago it used to be 17-19% in EURO and that has changed to above 30% by now.

its not healthy. not for US economy and not for global economy but it is what it is.