Raise Rate or Not to Raise Rates? - That is the Question

Published on: 16 Oct, 2018

Rising U.S interest rates are sparking debate among economists while spreading anxiety among investors. The current rate hike has split economist into two camps, those that feel the Fed is acting hawkish in their rate hikes, and those that feel the hikes are necessary for preventing an overheating economy. While investors are less divided in the issue, higher interest rates lead to lower gains and even losses in the stock market. However, it is important to note the pressure of the growing trade American- Chines trade war playing a key role in investor stock sell-off.

Last week the Dow slipped roughly 1400 points in two days, the S&P 500 fell close to 4.2%, while NASDAQ fell 3.7%. Global markets too felt a hit as the IMF lowered global growth estimates by 0.2% in 2018 and 2019.  The concern of the IMF is that the higher US interest would place a strain on the economic growth of emerging markets which took advantage of the record low US interest rate. However, Jerome Powell, Fed Chair, is of the opinion that US policy should not be bounded by overseas economies. Moreover, the IMF site the escalating American – Chines trade war as a significant factor.  

While on the domestic front, investors are feeling the sting of the interest rate hike, the Dow is on track to record the worst October performance since the Great Recession of 2009. Prompting Trump to label the Fed as “crazy” for “going wild” with interest rate hikes. However, there are several issues with that trail of thought. The first being that it is wrong for a sitting president to inject politics into the policy of the Fed - the Fed was established to be an independent branch of the government free from political ideologies. The second is that a key factor in higher stock prices is the earnings forecasts of companies. If these companies feel an expected rise in their cost of production is looming over the horizon – say for an escalating trade war – they will project lower earnings. Though it is important to note that rising interest rate will always lead to lower stock, this is amplified by growing trade tensions are experts sight the reason for the stock sell-off were due to a mixture of rising interest rates, technology stock valuations, and trade tensions.

Mad Money host Jim Cramer, though in favor for further rate hikes this year, argues that the Fed has become “become very anecdotal in their analysis… [and are] making the same mistake now that they made 11 years ago”. Though Cramer believes the market situation is not identical to that of 2007, he feels stock prices will fall a heavy blow from the effect of the rate hike. Nevertheless, J.P. Morgan chief Jamie Dimon believes geopolitical are the key issues that could threaten U.S. economic growth. That paired with softer results from key inflation indicators like the consumer price index.

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Disun Holloway

Email: Disun@financialinsiders.com

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