Fed Delays Rate Hike According to New Report

Investors are waiting for the Fed to raise prime interest rates, and the Fed is waiting for investors -- and the economy -- to be ready for it. Until now, the smart money was on June for an interest rate hike. However, some minutes that were recently released from a Fed meeting held in April tells a different story. It appears as though the Fed will hold off on this latest rate hike until the economy has settled down and the markets are stable.

April Meeting Minutes Released

The minutes from the Fed's April meeting were finally released, and what they have to say is very telling.
One key passage from the minutes mentions the slight possibility that a June hike is still on the table.

The minutes said that, “many participants, however, thought it unlikely that the data available in June would provide sufficient confirmation that the conditions for raising the target range for the federal funds rate had been satisfied, although they generally did not rule out this possibility.”

Rate Hike Likely Postponed

This wishy-washy language is telling in and of itself. If the Fed were still planning on a June hike, there's no way that they would hide behind June's data. For one reason, June is only the start of the summer boom in lending, so any data available in June will likely be extremely preliminary. The Fed has been extremely bearish over rates since 2008, and there's no reason to think this will change until the economy is settled in and growing.

Scheduling A New Rate Hike

The obvious question to ask is, “If not June, then when will rates go up?” The answer is likely September, which is the next scheduled meeting in which the Fed will discuss a hike. Although interest rates can be raised at any time -- it's one of the powers given to the Federal Reserve -- they typically won't step in and raise them off-schedule unless there's a dire need.

Borrowing Will Get More Expensive

The Fed controls the prime rate, which is what banks pay to borrow money from one another and from the central bank. Fed rates dictate borrowing and repayment at the highest levels of finance, and changes in the prime rate will trickle down and effect every citizen. It will be more expensive to get a loan, but bond yields and savings account interest rates will both rise.

What Does This Mean For Investors?

As the US dollar continues to recover, it can be tempting to look at the growth in the bond market and feel like the time is right to jump in. Smart investors will wait until after the prime rate is raised, as that will help to deflate the price of the dollar slightly and drive rates even higher.

If you're looking for the best time to enter the bond market, wait until after the Fed announces the next rate hike -- your yields will be much higher, and the stock market will likely contract some when the announcement is finally made.
Published on May 21, 2015
By Aaron Phillips
Aaron Phillips is a financial researcher and journalist based out of Michigan. He regularly writes the IG Daily and IG Weekly columns.

Copyrighted 2016. Content published with author's permission.

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