September Rate Hike: Will They Or Won't They?

Next week will be a big one for U.S. markets as the Federal Reserve is due to hold its monthly policy meeting over two days on Wednesday and Thursday.

The September meeting is a pivotal one, as investors are 50/50 on whether the bank is planning to raise interest rates this month or hold off in light of the recent market turmoil.

Bank Divided

Fed officials appear to be divided on whether to raise rates, as comments from the central bankers in past weeks show that there are several opinions on the matter.

Some Fed officials believe that low rates for an extended period could eventually trigger asset bubbles. Those who support a rate hike point to the job market's improvement, saying that the U.S. economy is ready to stand on its own. However, on the other hand, worries about inflation and China's economic slowdown are making some central bankers nervous about a hike.

Related Link: Bill Gross Sees A 50/50 Chance Of A Rate Hike: Here's Why

Investors Brace For Market Shock

As the Fed has waded out into uncharted territory by keeping interest rates low for such a long period, many are unsure of how a rate hike will affect markets. Many investors worry that a rate increase will wreak havoc on share markets and have begun to prepare their portfolios.

For investors expecting a rate hike next week, financial sector stocks are an attractive bet, as most banks will be able to pass the cost of regulatory changes on to consumers, thus protecting their bottom lines.

In other sectors like healthcare and technology, investors are choosing stocks with low debt levels as borrowing is expected to become more costly with a rate increase.

Slow And Steady

Whether the bank chooses to raise rates this month or holds off until October or December, most analysts agree that a rate increase is coming sooner or later.

However, some say the market's panic is overdone as the Fed has promised to move slowly with consecutive rate increases after the first hike.

The bank plans to evaluate the outcome of its first rate hike and could even lower rates again if there is a negative economic reaction following the increase.