Today’s the big day.
After a two-day meeting, the Federal Reserve’s policy setting committee is expected to announce on Wednesday that it is raising its benchmark interest rates for the first time since 2006.
This would mark the end of the zero-interest-rate policy, or ZIRP, which was implemented with the intent of rejuvenating the US economy after the financial crisis.
Fed Chair Janet Yellen has recently noted that the labor market has sufficiently improved, and that she’s confident inflation will follow suit. She has also warned about the risk of waiting too long to hike rates back and then having to play catch-up and tightening financial conditions too quickly.
Admittedly, not everything the US and global economy is great right now. There are still a number of concerns, including the turbulent credit markets, the stronger dollar, and the slowdown in the emerging markets.
But even with those fuzzy areas, “it is difficult to argue that the Fed is making a mistake by raising rates today,” argues Deutsche Bank’s Torsten Sløk.
“The Fed has a dual mandate of price stability and full employment, and if you look at the dual mandate indicators they are generally very similar to where they were in 2004 when the Fed began its latest rate hiking cycle,” Sløk writes, which you can see on the chart above.
“If you think liftoff today is a mistake, then it is because you worry about other things that are not seen in the chart,” he continues. “The problem with these arguments is, however, that so far they have not had much impact on the expansion.”
To further drive the point home, Sløk also shared a chart showing job creation in the US since all three of the aforementioned headwinds began, which you can see to the right.
Although things haven’t been stellar in the manufacturing and energy sectors, services is certainly doing well. Over the last 18 months, the service sector added 3.5 million jobs, manufacturing added 140,000, and energy lost 100,000 — a net win overall.
“We are watching carefully credit markets, EM, and dollar appreciation but looking at the continued strength in service sector hiring and keeping in mind that these shocks have now persisted for 18 months and still not had a negative impact on the macro economy,” writes Sløk.
“Until we see evidence of a slowdown in the macro data, it makes sense for the Fed to go ahead and raise rates,” he concludes.
In any case, stay tuned for the live coverage of the Fed announcement at 2:00 p.m. ET on BI:Markets on Wednesday.
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