September Rate Hike Not a Slam Dunk

A rate hike by the Federal Open Market Committee (FOMC) is hardly a certainty given what has been scrolling across the headlines these past few days. The collapse in prices of the energy markets aren’t likely to trickle through inflation data until later this fall. It’s becoming more and more likely that we won’t even see a rate hike in 2015.

For most of the summer it was a foregone conclusion that the Federal Government (Fed) would raise rates in September. I was in the camp that the economy was just not strong enough and there was no evidence that inflation was rising to warrant a hike. Many people argued that the Fed had to get off of the starting line and catch up to the financial markets where interest rates had already began to rise. That debate has raged on.

Fast forward to this week, the start of school and the unofficial end of summer. The financial markets are trading exclusively on headlines with the complete collapse in oil prices leading the way.  Oil is getting absolutely smoked as the government just released a report that US stockpiles unexpectedly increased. Today, West Texas Intermediate has slipped as much as 3.4 percent after a government report showed a rise in supply of 2.62 million barrels last week. Oil prices are down over 30 percent since June, fueling fears about further global economic risks.

Additionally, we saw a significant drop in Consumer Price Index (CPI), .1 percent versus an expected reading of .2 percent, showing that inflation is not keeping pace with the Fed’s expectations. Chinese equities, Kazakhstan, Greece and the Eurozone, ISIS, etc. round out the list of things forcing investors into the safe haven of the bond market.

Right now, Fed Futures are only giving a September rate hike a 36 percent probability. With low rates, cheap gas and decent job gains, maybe we’ll see a decent pickup in consumer activity in the US.

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