Why The Fed Should Consider A Rate Hike Of 25 bps Today

The last rate hike occurred on 6/29/06 to 5 1/4%.

The ensuing run after the rate hike lasted for 6 months.  It was a strong push higher.  This is not typically the reaction that you’d expect when the Fed is hiking rates, but this was the last rate hike after a series of hikes.  They then went on hold.  That’s what pushed markets higher.  The anticipation of rates being frozen - with the prospect for lower rates.

Today our situation is different:

12/16/08 - The Fed moved the target rate to 0-1/4% and there is nowhere to go but same or higher. The market knows this and has topped out at 1100.  I can’t imagine that we will push valuations higher than 1100.  If that happens, the potential for a downside move becomes even higher and more volatile when the Fed does embark on a higher rate plan.

If the Fed doesn’t hike today, they could be perceived as “weak”. All the good news that the bulls have been enjoying must certainly mean that the economy is getting better.  The Fed should reflect that in their interest rate decision.  If they fail to raise rates, then the bears will know that the situation is truly worse than the data is suggesting.

IMO, the Fed should consider a raise of 25bps today.  It will confirm the economy is improving, and will provide some short term support for the US dollar as well.

Subscribe by RSS Subscribe by Email