The Fed: Betting on a rate hike
Historically, the Fed has been quiet leading up to an election. But
some traders think the Fed could raise rates as soon as October.
NEW YORK -- There is a growing sense that the worst of the credit
crunch may be behind us. And despite a tamer-than-expected reading for
April, inflation is still very much a concern for many Americans.
So with that in mind, could the Federal Reserve be forced to raise
interest rates before the end of the year....even in the midst of the
presidential race?
The Fed has historically been reluctant to make significant policy
moves in the months leading up to the election.
TalkBack: Should the Fed raise interest rates before the election?
According to futures listed on the Chicago Board of Trade, investors
are currently pricing in a 56% chance that the Fed will raise its
benchmark federal funds rate by a quarter of a point, to 2.25%, at the
conclusion of a two-day meeting on Oct. 29. Traders widely expect the
Fed to keep rates at 2% at meetings in June, August and September.
There have been calls for the Fed to, at the very least, leave rates
alone for the foreseeable future. Critics of the Fed have maintained
that a relatively low federal funds rate, an overnight bank lending
rate that affects how much interest many consumers and businesses pay
on loans, has weakened the dollar and helped fuel the boom in
commodity prices.
"I really doubt the Fed would go and raise rates right before the
election, especially one that's hotly contested. But I think they
could definitely raise rates in December," said John Derrick, director
of research with U.S. Global Investors Inc., an institutional
investment firm based in San Antonio.
Still, if the Fed were to make a move just before the election, would
that be the right decision? I'd argue yes. The Fed has to do its best
to steer clear of politics. And even though raising (or lowering)
interest rates in the days before Americans hit the polls might have
an impact on the race, the Fed has to do what it is best for the
economy.
If food and gas prices continue to rise and the dollar remains weak,
the central bank may have no choice but to start raising rates.
At this point, it's unclear which candidate a rate hike would benefit
(or hurt).
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