Name: Here's What You Need to Know About the Fed's Next Rate Hike
Uploaded: 2016-05-27
Duration: 4 min 29 s
Description: Though any hike is minor, markets may freak out.

[ BLANK_AUDIO ] The fed is coming, the fed is coming. Yes, the on again off again discussion about where the fed will raise rates this year is back on the o position after of serious from various fed governors And a statement from the April minutes of the fed meeting that came out of mid May. That the fed is, quote on track to raise rates at their June meeting unless something dramatic happens between now and then. So the reality is it's not that big of a deal if the fed raise rates another 25 basis points. We're still not that far from 0. We're still at historically low levels. But, the market tends to freak out about these things and people are a little bit worried. That if the Fed does raise rates now, it could tip the economy back into recession. So, a lot of people think the Feds should wait and not raise rates at their meeting in the middle of June. Because just about a week later, there is the Brexit vote in Britain That is where voters in the UK are gonna go to the polls to decide whether or not Great Britain stays in the European Union. Now, this is potentially a really big yield, because no one's ever left the EU before, and nobody knows what impact it could have on the markets or the global economy. Europe is still about 25 % of global GDP, so anything that Causes a problem in Europe is definitely gonna be a problem for the global economy, and absolutely for the US stock market. So there is a compelling argument that the Fed should wait until after this Brexit vote, and presumably if it goes off and there isn't a major upheaval, then they have clear sailings and they could raise rates then. The Fed is telling us that they're data dependent, so let's look at the data. US GDP was 0. 5 % in the first quarter and just 1. 4 % in the fourth quarter. US economy is not growing in any great shakes. It was up about two and a half percent in the second quarter, at least that's what we think in the current quarter, but that number is subject to revision and two and a half percent is not that great to begin with The unemployment rate's at 5 %, but as everybody knows, that number doesn't count for the people who are out of the workforce or are working part time, and the labor participation rate is at a very low level, levels we haven't seen in this country since the late 1970s. That's a bad reason. Wages are up, about 1. 5 % on a year over year basis Which is good new for workers but 1. 5 % is not a whole lot of money, especially when you talked about 30 plus years of no wage growth for the average worker in this economy. So again the people are saying that the feds hey you should wait, they will look at the wage number and the real unemployment rate and things are not going great here and why you are in such a hurry. You can cut the data anyway you want, you can make a very strong case whether the feds should be raising rates here and why the feds should be waiting Even longer before raising rates again. From the Fed's point of view, there's a looking at the fact that there's still not far from zero, not far from where they were when the financial crisis hit in 2008, and they want a normalized rates. They wanna raise rates further away from zero So that if the economy does hit a real problem, then they can stimulate the economy. Right now, the Fed is kind of handcuffed about what they can do if the economy has a real problem. The Fed's always sensitive about raising or lowering rates during an election year. They don't want to be seen as trying to influence the outcome. They're probably more sensitive about it this time around, because Donald Trump has said that he'll get rid of Janet Yellen when her current term is up, And he's also supporting a bill that's been in congress for several years now to audit the fed. That kind of move would be seen as lessening the fed's independence, and a lot of people who support the fed think it's a really bad idea. The best time to raise rates is before the economy starts to heat up, before inflation starts to really pick up steam And so it's always hard to know when you've reached that point. There's definitely a school of thought that what the Fed says is more important than what they do, at least in the current cycle. And that Janet Yellen and this Fed particularly have been jawboning the market. They've been talking about what they're gonna do in anticipation before they do it, so by the time the actual event happens, it's already baked in and the market can absorb it. Have to tell you that the Fed is still worried about the stability of the financial markets. And that if they catch the markets by surprise, they could have a real negative impact. So in some ways, yes. The talk of the federate hike is maybe more important than the actual hike itself. So as we've seen the last few years, Wall Street loved cheap money. It's good for speculators. You could borrow for zero, you'll go ahead invest and just about anything. That's why you have to be worried about more federate hikes even if the rates still is a relatively low level So, maybe not this rate hike, maybe the next one the Street is starting to get worried that the Fed is taking away the punch bowl. That's probably not a problem until after the election and between now and then we're gonna have a lot of other things to worry about. [ MUSIC ] [ BLANK_AUDIO ]

Here's What You Need to Know About the Fed's Next Rate Hike

Though any hike is minor, markets may freak out.