New York – Wall Street stocks went higher in the holiday-short week, as it recovered some of the losses from the previous week’s drop ahead of the Federal Reserve System (Fed) meeting on whether to raise interest rates that have been near zero levels for almost a decade.

The Dow Jones Industrial Average increased 330.71 points (2.05%) to 16,433.09. The S&P 500 rose 39.83 (2.07%) to 1961.05, and the Nasdaq Composite Index earned 138.42 (2.96%) to 4822.34.

The market’s volatility is due to two main reasons. First, because of fears of a slowing economic growth in China, the second largest economy in the world. Second, analysts claim that the uncertainty from the Fed’s call on whether to raise interest rates or not is another cause. The scenario for a rate hike has been strengthened by steadily improving US labour data; however, inflation remains weak.

Federal Reserve Chair Janet Yellen (C) arrives to testify before a House Financial Services Committee hearing on “Monetary Policy and the State of the Economy.” at the Rayburn House Office Building in Washington, February 11, 2014. Photo: REUTERS/Mary F. Calvert

Fed’s Meeting

One of the world’s most anticipated events of the year will take place next Thursday at 2pm Eastern time, as the Federal Reserve will announce its decision on a possible increase in interest rates for the first time since 2008.

Despite all the controversy and heated debates about the Fed’s decision, experts agree that even if the central bank holds on raising its benchmark rate on the upcoming week (as the Wall Street Journal predicts), it will still happen within a few months. And whenever the Fed pulls the trigger, it probably will be just a quarter-point rise from today’s near-zero rate, hardly anything anyone will have to worry about.

“Whether they do it in September, October or December, it seems to me not to matter very much,” Alice Rivlin, a former vice chair at the Fed and senior fellow at the Brookings Institution, said to the Los Angeles Times. “People talk about it as being dangerous to raise it a quarter point. That’s silly.”

The Dilemma

Journalists from different media have described the Fed’s situation as a dilemma. For a better understanding of the scenario, let’s use Brazil as a reference.

The South American country, is currently falling into a recession. Commonly, when an economy turns down, the central bank usually responds with looser money and lower interest rates. With this, the central bank encourages businesses and consumers to spend more, cushioning the impact of the downturn. The problem here, which differentiates Brazil from the US, is that Brazil’s inflation rate is high and growing higher. As for Brazil, its two possible choices would be, or raise interest rates – which could sink the economy into a deeper recession – or lower them – which could result in more inflation.

With this in mind, the US actually faces the opposite of a dilemma. As for the US, inflation over the past years have been of 0.2%, being well below the Fed’s 2% target. Market projections have demonstrated that it will remain under 2% for the next decade. Meanwhile, the unemployment rate has fallen and stayed in a healthy 5.1%.

“What’s keeping the Fed from lifting rates is not the U.S. economy, which is actually doing quite well,” said Bernard Baumohl, chief global economist at Economic Outlook Group LLC, to the Wall Street Journal (WSJ). He predicts that the Fed’s rate increase will wait until December, instead of taking place during this month. “It’s the worry that a sharp slowdown in China will devastate emerging countries enough to drag down global economic growth, and that may ultimately impact the U.S., too.”

A new survey from the WSJ showed that most private economists predict the Federal Reserve will keep short-term interest rates near zero this next week. This is a major shift from results from a month ago, when the WSJ’s monthly survey of economists suggested a majority forecasting a September rate increase. But while the US economy seems to still be on solid ground, uncertainty about the pace of China’s growth and unsettled global markets have made experts think differently.

Source: Los Angeles Times