By Matthew Radman
Money and Investing Writer
After the last couple of anti-climactic meetings of the Federal Open Market Committee (FOMC), analysts are predicting that the stubborn Federal Reserve Bank federal funds rate will finally shift upward by the end of the year.
It is not likely, however, to change at the next meeting on November 1 and 2, because of the proximity to the presidential election on November 8.
The Fed’s own John Williams (President of the Federal Reserve Bank of San Francisco) is showing support for at least one more raise by the end of the year. He also said that he foresees a couple raises after the last meeting of 2016 on December 13 and 14.
This hopeful prediction of a 2016 rate increase comes from metrics that point to a U.S. economy that is, in Williams’s words, “well-positioned to raise interest rates.”
Factors such as unemployment hovering around 5 percent are extremely close to what many economists consider full employment and inflation is currently around the Fed’s goal of 2 percent.
These metrics contribute to a convincing case to begin pumping the brakes on the economy and returning the federal interest rate back to a more normalized level.
December’s meeting could potentially be the beginning of a series of raises over the next few years that would pull us farther away from the extremely low levels of interest that we have been at for years.
Of course, a raise in the rate also increases the cost of borrowing money for businesses. In preparation for the possibility of that happening in the coming months, the futures market has actually seen gains in vital commodities.
As of October 21 2016, Gold is up 1 percent for the week, Oil has seen a similar 1 percent increase which supports a fifth straight weekly gain, and the US dollar is also seeing gains for its third straight week. The futures market is closely tied to interest rates and has long been a predictor used by the Fed to predict the potential price changes of vital commodities. Those assets, in turn directly impact inflation rates.
The Federal Funds Futures rate is a tool used to see how investors feel about a change in rates. In fact, the widely utilized FedWatch tool from CME Group uses the futures price to predict the possibility of a rate hike.
As of October 21, 2016, it predicts a 90.7percent chance of its target range being 25-50 basis points (.25-.5 percent) during the November meeting.
These predictions, of course, do not take into account the election and therefore may not reign true. However, it predicts that the December meeting will bring that range or even more to .5-.75.
At this point, it is likely that the Fed will raise rates in December which affects all markets, but especially the closely tied futures market.
The real unknown now is what happens in 2017 and how does the market react to the Fed’s likely multiple hikes during that year. However, the likely rate hike and strong commodity prices all point to a growing US economy, one which is increasingly well-equipped to handle a more normal Fed funds rate.
To view FedWatch’s current predictions, visit http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
A version of this article appeared in the Tuesday, October 25th print edition.
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