Why I believe Fed may surprise us with a rate hike

Now don’t catch me by my throat if Fed holds rates unchanged ..but allow me to take credit if it does hike rates !

Jokes apart, I think Fed may surprise us with another 25 basis point rate hike today. Markets have put the probability of a rate hike at just 4%.

But, I do believe markets can over appreciate or under appreciate central bank actions. Moreover, central bank should not bow down to markets each time, especially when market expectations do not match actual economic scenario.

I won’t detail economic hosh-posh for why I believe a rate hike is coming. just simple logic and here it is –

  • If people say economic is weak and rates should not be hiked, it means low rates are a part of problem and not a solution
  • In December, oil was going down, manufacturing was in recession still Fed moved rates higher. Now oil is moving up,  unemployment rate is low, so there is no reason for the Fed to delay rate hike.
  • And last, if rate hike is to happen, it should come now or in December. Markets see rate hike in June/September, but that would be difficult for the Fed to manage considering general elections are in November.

Other reasons for Fed to move rates today are-

  • financial markets are steady
  • world is awash with liquidity, China too is on a rate cut cycle
  • US labor market continues to improve.

Overall, I do not see any reason for Fed to delay rate hike!

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