Could the US economy withstand the increase in interest rates in 2016? This is the main issue for the majority of investors.
It is well known that the perfect balance of macroeconomic indicators (unemployment, inflation and the GDP) is required in order to make a decision regarding an increase of the interest rate. The US unemployment rate is 4.9% according to recently published data, which is favorable for the rate increase. But at the same time, the number of jobs was cut, which shows the ambiguity of US unemployment.
At the last meeting (March 16, 2016), the Federal Reserve established that the unemployment rate should be reduced to 4.7% during 2016. It is projected to be 4.6% in 2017 and 4.5% in 2018. The inflation rate is expected to be 1.2% in 2016 (compared to the projected rate for December of 1.6%), 1.9% in 2017, and 2% in 2018. In turn, GDP growth is expected to be slower and smaller (it was changed to 2.2% from the projected 2.4%). This was caused by both weakening growth of the global economy and the influence of other less stable countries on the US economy.
Revision of the above mentioned macroeconomic indicators led to the decision that it is too early to increase interest rates. The current situation in the commodity market also facilitated it, as the rate increase will cause a rise in the dollar and further drop in commodity prices. The US is not interested in this, as the majority of the American oil-producing companies have become insufficiently profitable since the beginning of the year. It was also concluded to cut the number of interest rate rise approaches from 4 to 2 in 2016. It is considered to be a positive decision for the commodity market as it will be easier for commodities to stand a gradual increase than a series of sharp interest rate increases.
Let's take a look at the market behavior prior to this event. It is worth saying that the dollar strengthened when expecting the Fed rate increase, but not because of the actual tightening of the monetary policy.
The day before the meeting, the Fed requested leading US banks to predict the consequences of the negative interest rates implementation. Such a request put the association of the US banks on guard, so now they insist on the speedy increase of rates. However, leading economists argue that the US situation is not so bad as to apply negative rates.
In conclusion, it should be said that the monetary policy tightening requires complex and detailed analysis. The increase itself should be useful. The Fed increases rates only at market confidence of at least 60%. Therefore, quick increase is unlikely, as the market is not ready yet. According to the FedWatch CME Group (NASDAQ:CME)'s statistical research, the chance of a rate increase is expected to be 22% in April, 47% in June and 60% only in September. However, taking into account all the foregoing reasons, we do not hurry to make sudden conclusions and expect the session in April 26-27, 2016, to potentially adjust requirements again.