DEUTSCHE BANK: Here's our advice to the Fed

Deutsche Bank’s David Bianco thinks the Federal Reserve should raise rates next week.

At its September 16-17 meeting, the FOMC is going to decide whether to raise its benchmark rate for the first time in a decade.

Just a few weeks ago, the odds of a hike were at 50%, based on Fed fund futures.

But after witnessing the most volatile stock market moves in several years, people changed their minds and decided the Fed’s best bet is to wait until December, with the odds of a move next week now at 30%.

In a note to clients last Friday, Deutsche Bank’s David Bianco argues that although it’s a tricky decision for the Fed, there’s enough motivation for a hike next month (emphasis added):

“Labour market indicators suggest that it is time for the Fed to get off of zero and we do not see delaying until 2016 as a low risk option given the ongoing confusion it will cause investors and other central banks. However, the risks of a stronger dollar amidst weak global and weak US manufacturing conditions suggest a careful compromise. Our advice to the Fed: Hike to 50bp in Sept and state that this is likely the only hike until mid 2016. The Fed has hiked in the past (1967) despite lower mfg ISM’s than August’s 51.1 and has tolerated dips (1994).”

As we outlined over the weekend, the jobs report and other economic indicators point to a firm domestic economy. The labour market is in good shape, and in August, the unemployment rate fell to a level that the Fed defines as ‘full employment.’

And despite the stock market’s roller coaster ride, the S&P 500 is still near 2,000 — a level that makes a hike this month likely, according to Bianco.

And so, Bianco argues that with good communication, the Fed can make its move this month, and then hit the pause button until 2016.

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