The Fed won’t raise rates this year – and maybe not next year either

Once again, the US Federal Reserve decided against raising interest rates. And they’re unlikely to be going up any time soon. John Stepek explains what that means for your money.


Janet Yellen: bottled it on interest rates again

Common sense suggests to us that there are no sure things in markets. And (occasionally bitter) experience tells us it's true.

It's extremely hard to lose money by underestimating the Fed's capacity for bottling it when it comes to raising interest rates.

And if you understand that, it tells you a lot about where your money should be just now

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The Fed manages to out-dove everyone

The majority of pundits had expected one of three things from the Federal Reserve, which all boiled down to the same thing.

Maybe they'd keep rates near 0%, but warn the market that a rise was coming (via a hawkish' press conference). Or maybe they'd raise them by 0.25%, but have a very reassuring (dovish') press conference. Or they'd go for a halfway house, and raise rates by a derisory 0.125%.

In short, we'd be taking baby steps. But even if rates didn't rise, we'd know which direction we were heading.

But in the end, the Fed did what it always does. It undershot expectations. Not only did it not raise rates, it gave itself plenty of reasons not to raise rates for the rest of this year. Only one member of the ten on the interest-rate setting committee voted to raise rates. There was even one who thought rates might be negative by the end of the year.

And the thing is, there's an election in the US next year. So the Fed only has a small window of opportunity to start a tightening cycle before it becomes trickier politically to make any move (we had this same sort of discussion in Britain ahead of the general election this year).

What stopped the Fed? The US itself is doing fine (that may or may not last, but the official data which the Fed presumably uses says that both employment and growth are pretty normal).

Instead, the Fed fretted about China, and hinted at the difficulties caused by a strong dollar. It's fair to say that a strong dollar means tighter global monetary policy. The dollar is the global reserve currency. So when dollars get more expensive ie harder to get hold of that affects everyone.

But I think the reality is probably a lot simpler. Once again, like everything that involves humans making choices, it's about psychology and incentives.

Central bankers are only human

The Fed and its academic tribe believe that central bankers caused and extended the Great Depression by being too quick to raise interest rates. They also think that Japan is where it is because its central bankers haven't been radical enough (at least, not until now).

So the Fed is fully invested in the idea that raising rates too early is a far bigger risk than raising them too late.

If Janet Yellen raises rates now, and the market crashes (which is a not insubstantial risk), then her name is mud among the people whose good opinion she desires. There'll be a chorus of "we told you so", and the Fed will get the blame (regardless of the reality) for crashing the economy "just like in the 1930s", they'll say.

So the Fed won't raise rates until it's forced to until it can't ignore inflation. And by then it'll definitely be playing catchup. As Paul Ashworth of Capital Economics notes:

"The longer the Fed delays now, the higher interest rates will eventually have to go."

But that won't matter. Because at least Yellen won't have made the mistake' that all her peers are warning against. And because they'll all have made the same mistake as her, they'll be supportive and forgiving.

So assuming I'm right, and there are no sure things in this world what's this all mean for your money?

What this means for investors

Secondly, if the US dollar bull weakens, that's going to put particular pressure on central banks in Europe and Japan. They've been basing their strategy on their own currencies getting weaker. So both of those central banks are going to have to increase their own dovish' rhetoric, to talk the euro and the yen down again. That's likely to help prop up share prices in those markets.

Thirdly, a weaker US dollar is good news for commodities and emerging markets that have taken a big hit on the stronger dollar. So if you've been eyeing up China for opportunities (as we've been suggesting all summer), then now could be a good time to start acting if you haven't already.

We had a few suggestions as to what you might buy in a recent issue of MoneyWeek magazine.

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John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.