The markets are riding a five week rally since the election of President Elect Donald Trump but no one is quite sure what Wall Street will do if the Federal Open Market Committee decides to raise the federal funds rate after their two day meeting Wednesday. The Federal interest rate is charged for Fed funds, which are loans made by banks to each other to meet the Federal reserve requirement. Technically, these rates are set by the banks themselves, not the Federal Reserve. However these rates rarely change from the target rate. The last time the Fed raised the benchmark interest rate was last December, when it rose by 25 basis points or a quarter percentage point.
Many analysts and economists believe it is likely the FOMC will raise the rate for the first time this year at their final meeting of 2016, on Dec. 13 and 14. (Tuesday & Wednesday) The Fed is currently holding its benchmark rate in a range between 0.25 percent and 0.5 percent
What will happen on the market if the rate goes up? Some of the possibilities:
- Some have speculated that stock markets would be vulnerable to sharp declines and would lead to a resumption of fears that the extended period of easy accessibility to money in the financial markets is coming to an end.
- This could mean investors are going to be encouraged to take their money out of major stocks.
- There is already fear that central banks are unable to loosen monetary policy any further to assist economic growth, which is not favorable towards the stock markets when you consider eased monetary policy and accessibility to money in the system has been the major driver behind equity markets reaching milestone highs.
- A rise of US interest rates this Wednesday could be the spark for a major-sell off throughout the global stock markets.
- Emerging markets could suffer too.
Meantime, Judy Shelton, co-director of the Sound Money Project at Atlas Network (which favors the gold standard) and member of President-elect Donald Trump’s economic advisory team, told CNBC last week that the Fed should not be driving the U.S. economy.
“What you want is productive growth and the kind of growth that is truly stimulated by tax reform, by regulatory reform, trade reform and important infrastructure projects to upgrade our ability to be more productive as a nation. If there is turmoil once the Fed raises the interest rate, then things are a lot more fragile than we thought.”
See more of Judy Shelton’s interview on CNBC’s “Closing Bell” below.
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