Rate Hikes, China And More: What The FOMC Will Be Discussing This Week
The Federal Open Market Committee will hold its fifth scheduled meeting of 2015 this week. The group will convene privately on Tuesday and Wednesday to discuss American monetary policy, particularly the question of when the Fed should raise interest rates above zero for the first time in more than six years.
Although few people expect a rate hike to be announced on Wednesday, the world will be watching for indications of when exactly the Fed will decide to finally make a move.
Benzinga spoke with several experts to get their thoughts ahead of the meeting.
The Domestic Economy
The economic story in the United States of late has been generally positive. Phil Davis, founder of PSW Investments, said that the country has seen very strong auto sales, mixed but relatively good housing data, good recent GDP growth and a healthy jobs sector. In particular, he mentioned that the desire to stem wage inflation as one reason that the Fed might be inclined to raise rates this year.
According to JJ Kinahan, Chief Strategist at TD Ameritrade, the federal funds market has priced in a 56 percent probability of a rate hike by the end of the year, which is higher than the figure before last month's meeting. He is confident that the Fed will decide to act within the next few months.
The one major concern, in Kinahan's view, comes from recent earnings reports. "A lot of companies have struggled to beat on revenues," he noticed. "A stronger dollar is going to make that even harder."
But the largest red flags aren't being raised from within the United States; they're going up in foreign markets.
Although Greece has agreed on terms for a bailout, Matt Tuttle, founder of Tuttle Tactical Management, told Benzinga that Europe should still be a concern for the Fed.
"The real problem with Greece isn't Greece...it's what happens with the European monetary union." Furthermore, he still sees no recovery in sight for the Greek economy, which will operate under harsh austerity measures for the duration of the new bailout agreement.
Related Link: Chinese Stocks Experience Largest Decline Since 2007
Davis also highlighted China's renewed economic woes. The Shanghai Composite Index fell 8.5 percent on Monday, as the Chinese government failed to contain a market downturn that began earlier this month. "They could not have pulled out more stops to boost the market…we're seeing that there must be something really wrong."
Davis worries that China's GDP figures are inflated and that an ensuing economic crisis could spread to the United States. He mentioned that Singapore's GDP has already tanked 4 percent "because of China" and that Korean electronics producer Samsung has sputtered as well. He believes that the Fed needs to consider the possibility of a Chinese collapse in its discussion of interest rates.
Tuttle also thinks that the FOMC will need to look at how monetary tightening could destabilize currencies in emerging markets, where many central banks are easing interest rates.
"They're going to be data dependent," he said. "But the data isn't just [in the United States]."
Kinahan, Davis and Tuttle all expect the Fed to boost the federal funds rate before the end of 2015. "They really, really, really want to raise rates," Tuttle said, and they'll do it if it doesn't mean "messing everything up."
"They need to get it out of the way," according to Kinahan. "It's just been the 500-pound elephant in the room."
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