Will the Fed really raise interest rates in December?

The US Federal Reserve is keen to convince everyone that it could raise interest rates this year. John Stepek looks at how likely that is, and what it would mean.


US Federal Reserve chair Janet Yellen would rather raise rates too late than too early.

The US Federal Reserve seems keen to convince markets that after the September wibble caused by China's crashing stockmarket it's still very capable of raising interest rates this year.

The minutes from the last meeting of the Federal Open Market Committee (like our Monetary Policy Committee) show that "most participants thought that the conditions could warrant the start of policy normalisation at the December meeting", notes Capital Economics.

So is the Fed likely to raise rates on December 16? And will the market see it as a Christmas present, or a lump of coal?

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Let's take a look.

Even if the Fed raises rates in December, don't expect much follow-up

That shift started when the employment data for October came in far more strongly than expected. And with the Fed talking up the chances of a rise, the dollar has got stronger too, making life even tougher for commodity markets in particular.

It's always worth remembering that, in central banking, expectation matters just as much as what actually happens. Sir Mervyn King who in retrospect, wasn't particularly good at this stuff always drew a football analogy. The central banker is often like a striker who persuades the defenders that he's going to go left or right, but then shoots straight down the middle while they're distracted.

The mere expectation of higher rates is helping to push the US dollar higher in particular, which results in tighter financial conditions across the world. So it's hard to see the Fed being overly happy about the dollar continuing to strengthen from here.

The fact that China is making policy looser and the European Central Bank is setting up to print more money might make the Fed feel a little more comfortable about raising rates in December, but it'll be keeping a close eye out for signs of panic in the markets.

Because another key point to remember is that the Fed doesn't want to make the same mistake as it believes it did during the Great Depression. It doesn't want to tighten too early. Janet Yellen, current head of the Federal Reserve, would much rather risk being wrong by being too late to raise rates than too early.

I'm not saying that the Fed won't raise rates in December. We're at the stage where markets will feel very messed about if there isn't at least a nod to doing so. However, I certainly wouldn't be betting on it either if I was a trader, I wouldn't want to have any currency positions open before the results of the next meeting come through, for example.

And remember that the latest batch of minutes only came through before the terror attacksin Paris. So there are plenty of excuses to hold off in December if the Fed feels it wants to.

In short, don't be surprised if the Fed fails to lift off in December. And if it does, don't expect to see further rate hikes until this one has been allowed to bed in' for a good long time. This isn't going to be an aggressive rate-rising cycle unless inflation gets out of control. Remember, the Fed ultimately wants to be behind the curve' and that's what it'll get.

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.