A big question for many traders this week is will the Federal Reserve raise interest rates? A federal interest rate decision is an upcoming event this week that can affect the market, so in this post I will give my thoughts on the topic.
Firstly I am quite neutral on whether they will or not, meaning that I think the result could go either way. Because of that reason I suggest traders prepare accordingly for either scenario.
Let me share my opinion for why they may or may not raise below.
Above – Above screenshot showing economic calendar for this week and upcoming Federal Reserve Interest Rate forecast. Many are forecasting a rise from 0.50 to 0.75 percent.
Be aware that above screenshot image is showing Australian time for this event.
Credibility of the Federal Reserve is a big reason that leads me to think they may raise this week more so than any other factor, the Federal Reserve has been hinting at a interest rate rise now for many years and if they do not raise this time it could lead to investors taking them less seriously.
Another factor to consider is that raising interest rates is part of debt market cycles, a period of low rates to encourage spending via debt to stimulate growth, ( whether debt growth or real growth ) then raising rates to discourage lending and encourage paying back debts. Raising rates essentially is the Federal Reserves way of saying to Americans to start paying back debts, whether government debt or private ( housing, mortgages, etc ).
Why not raise?
One of the main reasons for not raising interest rates is because of the national government debt level in the U.S. This is at record levels and has nearly doubled in the last 8 years. The current national debt in the U.S. is just under 20 trillion dollars, to see the current debt clock.
Raising interest rates would mean higher interest costs on servicing that debt and thus cause issues for the U.S. government repaying.
Image to right: Calculator showing interest costs of 20 trillion dollars of debt each year at 0.75 percent. This does not include repayments, transaction fees, admin fees and other related costs.
Is a interest rate rise factored in?
I think it has been factored in all year and now more so than any other time, so if they do not raise it could affect the U.S. dollar quite negatively. This also suggests that if they do raise as forecasted that the market may not respond much at all, as it is already factored in to the price.
Aspects to consider
A higher rate suggests higher interest costs for the government on the national debt, so unless economic conditions improve immensely in the short term, the Federal Reserve in my opinion would have to provide some type of accommodating approach.
The biggest risk in my opinion is for those holding buy trades on U.S. based markets if they do not raise. This could cause a surprise drop in U.S. dollar value.
I would suggest either not trading before event or limiting exposure to U.S. based markets before this event in case of a possible surprise hold on raising interest rates.
Let me know what you think, will they raise interest rates or will they hold once again this week?