Could the US economy withstand the increase in interest rates in 2016? It`s the main issue for the majority of investors.
It is well known that the perfect balance of macroeconomic indicators (unemployment, inflation and the GDP) is required in order to make a decision regarding the increase of the interest rate. The US unemployment rate is 4.9% according to the recently published data. It is favorable value for the rate increase. But at the same time the number of jobs was cut, that shows the ambiguity of the US unemployment. At the last meeting (03/16/2016), the Federal Reserve established that the unemployment rate should be reduced to 4.7% during 2016, it is projected to be 4.6% in 2017 and 4.5% in 2018. The inflation rate is expected to be 1.2% in 2016 (compared to the projected for December 1.6%), 1.9% in 2017, 2% in 2018. In turn, the GDP growth is expected to be slower and smaller (it was changed to 2.2% from the projected 2.4%). It was caused by both weak growth of global economy and the influence of other less stable countries on the US economy.
Revision of the above mentioned macroeconomic indicators led to the decision that it is too early to increase interest rates. The current situation in the commodity market also facilitated it, as the rate increase will cause the rise in the dollar and further drop in the commodity prices. The USA is not interested in it. As the majority of the American oil-producing companies have become insufficiently profitable since the beginning of the year. It was also concluded to cut the number of interest rate rise approaches from 4 to 2 in 2016. It is considered to be a positive decision for the commodity market as it will be easier for commodities to stand gradual increase than a series of sharp interest rate increase.
Let`s take a look at the market behavior prior to this event. It is worth saying that the dollar strengthens expecting the Fed rate increase but not because of the actual tightening of the monetary policy. Therefore, the Fed strives to hold live sessions, that means a high possibility of the interest rate rise at any meeting.
The day before the meeting, the Fed requested the leading US banks to predict the consequences of the negative interest rates implementation. Such a request put the association of the US banks on guard, so now they insist on the speedy increase of the rates. However, leading economists argue that the US situation is not so bad to apply negative rates.In conclusion, it should be said that the monetary policy tightening requires complex and detailed analysis. The increase itself should be useful. The Fed increases rates only at market confidence for at least 60%. Therefore, quick increase is unlikely, as the market is not ready yet. According to the FedWatch CME Group statistical research the rate increase is expected to be 22% in April, 47% in June and it is expected to raise to 60% only in September. However, taking into account all the foregoing reasons, we do not hurry to make sudden conclusions and expect the session on April 26-27, 2016, which may adjust requirements again.