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What’s next for the Fed? Not necessarily rate hikes this year

October 4, 2016, 9:34 am

During its September meeting, the Federal Reserve decided against raising interest rates – as many had expected. The Fed cited that, while the case for an increase had strengthened, it would like to see further evidence of progress before they decide to raise rates.

Todd Hauer

Todd Hauer

Though there are two more meetings left this year, economists believe that all eyes will be on December as November will be too close to the election for a major increase decision. While some are predicting a rate hike will occur in December, we disagree that the case for the next rate hike has strengthened.

Morgan Stanley’s Chief US Economist Ellen Zentner believes justifying a hike this year will not be easy and the Fed will take no action this year or next. Given more accommodative monetary policy, Zentner maintains her forecast for 1.7% annual growth this year, but believes the economy will slow to a 1.5% annual growth rate in 2017.

The forecast is a result of mixed performance in recent economic indicators over the past few months. Job and wage growth slowed in August while the US Consumer Sentiment Index dipped slightly from August.

Additionally, a report from the Institute for Supply Management showed that U.S. services sector activity dropped to a 6 ½ year low in August amid declines in production and orders, further pointing toward slowed economic growth. The drop from July was the largest monthly decrease since November 2008.

The Fed will need to be more patient in determining whether or not the U.S. economy is able to handle a rate hike in the near future given the current economic climate. Some key Fed officials believe that core inflation will need to move closer to the 2% target before any action can be taken.

If Morgan Stanley’s predictions are correct and economic growth continues to slow, it’s unlikely we’re going to see the targeted 2% inflation rate, thus signaling no rate increases in the near future.

Investors with a close eye to the markets may become skittish when they can’t see down the road and may sell or allocate their assets and securities into safer areas. However, it’s important to note that a quarter of a point interest rate hike would still leave rates low, compared to historical norms. Generally, the average consumer will not see much of an impact until rates are raised more substantially.

One of the best ways to counter volatility and markets swings is to invest for “decades, not days.” In general, the market tends to reward consistency over time.

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