Why the Fed Won’t Raise Interest Rates in 2015

interest-rates-smU.S. short-term interest rates have stayed near zero for six years.

But if there’s one thing investment analysts of all stripes can agree on now, it’s that the Fed will start gradually raising rates in 2015.

I wouldn’t be so sure.

Yes, the Fed announced the end of its quantitative easing program in October. But it also said it would not raise interest rates for “a considerable time.” It also said future rate changes would be “data dependent.”

[ad#Google Adsense 336×280-IA]Translation?

The central bank wants to see what happens with consumer prices.

In particular, it wants to keep inflation under 2%.

That shouldn’t be a problem.

The current rate is only 1.7%.

And even that should soon come down.

Why?

For starters, the U.S. is about the only healthy horse in the race among developed nations. Europe is stagnant. Japan is back in recession. Even China is struggling with slower growth.

Weak global demand keeps a lid on inflationary pressures.

So does a stronger dollar. The greenback is up 10% since May and recently hit a five-year high against the euro and a nine-year high against the yen.

That makes imports cheaper in dollar terms. And makes it tougher for domestic companies to raise prices. Score one for consumers… and for inflation hawks.

The Oil Patch
Then we have the recent trouble in the energy sector. Since mid-June the price of Brent crude has plunged more than 30%, from $116 a barrel to a five-year low of $67.50 on Monday.

This is bad news for oil exploration and production companies. But it is good news for almost everyone else: chemical companies, manufacturers, auto retailers, transportation companies, most other businesses and virtually all consumers.

Lower oil prices translate into lower petrol prices at the pump. (And lower heating bills in some places.) Consumers then take that extra discretionary income to the mall and stimulate the economy.

So let’s do a quick summary. The global economy is soft. Commodity prices are down. The dollar is up. Wage pressures are almost nonexistent. And inflation is MIA.

So why would the Fed start raising rates? Just for the hell of it?

The world’s central banks want to do everything in their power to get national economies revved up before tamping on the brakes.

And with all these disinflationary pressures at work, the Fed may leave interest rates alone through all of 2015… fooling the guessers once again.

This is good news, of course, for the stock market. Low interest rates make it cheaper for consumers and businesses to borrow. It also makes cash and bonds unattractive relative to stocks.

Moreover, one of the oldest saws on Wall Street is “Don’t Fight the Fed.” History shows that bull markets often end within six months of the first interest rate hike.

So if you’re long equities, you want an accommodative Fed. And that’s exactly what we have.

Good investing,

Alex

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Source: Investment U