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The Argument Against A Rate Hike

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The Argument Against A Rate Hike

The Federal Reserve's upcoming December meeting is likely to result in an interest rate hike; the majority of analysts are expecting the bank to make a move.

After a year's worth of anticipation, the bank is seen making good on its intentions to raise rates before the end of 2015. At its October meeting, the Fed included rhetoric in its policy statement suggesting that the bank would move forward with a rate hike in December, as long as no new data came out in the interim to persuade the central bankers otherwise.

Now, with reasonably strong data figures backing a decision to raise rates, most believe the bank will almost certainly move in December.

However, not everyone believes the bank should, or will, make a major policy adjustment in December. Here's a look at the arguments against a rate hike.

Related Link: 8 Reasons Traders Are Preparing For A Rate Increase

Inflation

Concerns about inflation remain one of the largest reasons for pushback against a rate hike. The Fed set a 2 percent target for U.S. inflation, but many are expecting the bank to raise rates even though inflation figures show that the nation still has a ways to go before reaching that goal.

Fed Chair Janet Yellen has been optimistic when speaking about the direction of U.S. inflation, but not all of the Fed's members are so certain. Federal Reserve Governor Daniel Tarullo remarked that he still had concerns about U.S. inflation and that a rate hike may not be the best move. He said the bank must be careful not to overlook readings that show inflation expectations are near historic lows. He said that U.S. banks may need to make further changes to ensure they can withstand any shocks to the market.

The fact that inflation is still at sub-par levels has led many to protest a rate hike, saying that although the unemployment rate has fallen significantly, weakness in inflation data paints a mixed picture.

Wage Growth

Although the job market has improved by leaps and bounds since the Financial Crisis, rate hike protesters say unemployment figures aren't the only indicator of a strong economy.

Wage growth remains sluggish, something many believe may be an indicator of a deeper problem. Those against an interest rate increase say that many of the U.S. workers have taken part-time jobs in order to stay afloat, and that they are still unable to gain full-time employment. Others argue that one of the reasons unemployment has dropped is that many out-of-work people have simply given up looking for a full time job.

They point out that the U-6 rate, a measure including both part-time workers and those who have given up on the job search, is still above its pre-recession level.

Related Link: Morgan Stanley: December Rate Hike Wouldn't Hurt Economy

Global Instability

Another concern weighing on the rate hike decision is volatility in foreign markets. Earlier this year, China's markets suffered a massive setback that affected economies around the world. Many are concerned that although the United States has been able to weather the Financial Crisis, many of the world's other superpowers are still struggling to reverse course.

Markets around the world may not be able to sustain the ensuing pressure a rate hike might have, and for that reason, some believe the Fed should hold off until economies around the world have become more stable.

Currency Pressures

Tying into worries about global instability are concerns about currency fluctuations. The U.S. Federal Reserve is moving in the opposite direction of other banks around the world, leading the dollar to rise in strength against many other currencies.

If the bank raises interest rates, it is likely to propel the dollar even higher. While this isn't necessarily a bad thing, many argue that the greenback's added strength could have negative consequences for the U.S. economy. U.S.-based firms that operate across the globe have already been struggling with currency pressures, but an even stronger dollar could depress their earnings even further. A strong dollar also hurts U.S. exports, as American-made goods will become less competitive with their foreign rivals.

Some say that although the economy appears to be in good enough shape to withstand a rate increase, the consequences could undo the United States' progress.

Related Link: Of Rate Hikes And Small-Cap ETFs

Uncertain Future

One of the other reasons the Fed's rate hike has experienced resistance is a lack of precedence that the bank can use to ensure success.

Interest rates around the globe are at all-time lows, meaning that returning to normalcy is uncharted territory. To date, no central bank in the world has been able to raise interest rates from zero effectively.

Many are expecting the Fed to raise rates only to lower them again later when the economy begins to suffer. Others believe that the bank could return rates to normal levels, but only if the pace of the hikes is extremely low and tracks rises in inflation.

Posted-In: Central BanksTopics Global Top Stories Economics Federal Reserve Markets General Best of Benzinga

 

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