The Negative Rates Setup
Wall Street has placed its bet.
Right now, the CME Group reports that there is a 94.9% chance that the Fed is going to raise the fed funds rate from its current range of 25 to 50 basis points by another 25 basis points at its December 13-14 Federal Open Market Committee meeting.
We’ve been there and done that already. Last December, Yellen surprised many analysts with a rate hike of 25 basis points after the Fed dragged its feet and talked about a rate hike during all of 2015.
When we kicked off 2016, we heard chatter from the Fed that we could see up to four rate hikes in 2016.
How many have we had so far?
And that may just be because the economy was on far too shaky ground to tolerate higher interest rates.
Are we in a better position to tolerate an interest-rate hike now?
But Yellen has been eager to lay the groundwork ahead of the December meeting to save the market from a significant shock. In a round of speeches before Thanksgiving, she stated that the Fed could lift rates “relatively soon.” And if Yellen wants to sneak in a rate hike in 2016 after all the Fed’s talk about higher rates, well … December is her last chance.
Unfortunately, higher interest rates could cause trouble for multinational companies and their profits. As Jeff Opdyke has explained, higher rates in the U.S. result in higher demand for the U.S. dollar, which already shown disturbing strength. The U.S. Dollar Index is up roughly 2.3% this year and it’s only going to keep rising. A stronger dollar makes American goods more expensive overseas, making the U.S. less competitive and shrinking revenue.
Well, you can see how so much can fall apart from Yellen’s little nudge.
But there is a bright side to Yellen raising rates next month and kicking over the entire apple cart that is the U.S. economy. She’ll have room to cut interest rates twice in 2017 before she has to dive into negative interest rates.
Sr. Managing Editor, Sovereign Investor Daily