On tomorrow's Fed decision to hike rates

for the first time after 11 years

Tomorrow will be the first time since 2004 that the US Fed may raise the Fed Funds rate. (See this source for historical rate hikes including the one from 2004.)

Here are a couple of opinions as excerpted from John Hussman's weekly newsletter for this week.  

In brief, (a) it doesn't matter to the real economy and (b) not raising rates increases the risk of financial dislocation and global recession. Item (a) is Hussman's opinion and (b) is Albert Edward's.

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Here's Hussman's opinion.

"With regard to a possible quarter-point hike this week in the amount of interest that the Fed pays banks on idle excess reserves, our view – frankly – is that it doesn’t matter. [Highlight is mine.]" 

"With respect to the economy, we know that a quarter-point means nothing, given the weak correlation between policy rates and subsequent output, employment and inflation. From a purely economic standpoint, my impression is that the main effect of hiking interest rates would be to draw zero-interest currency into the banking system in the form of even more idle reserves. We’re already seeing indications of an economic slowdown, but the impact of a quarter-point hike on that dynamic is meaningless. The economic slowing we’re seeing here – which as yet isn’t strong enough to warn of recession – was already developing in February (see Market Action Suggests Abrupt Slowing in Global Economic Activity) and based on declining new orders, falling backlogs and rising inventories, is still underway. [Highlights are mine.]" 

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John Hussman also provides Albert Edward's opinion from SocGen the French bank. His view is as of last week.

“The clamour for the Fed not to enact the long-awaited ¼% rate hike next week is growing by the day. Misgivings come not just from reputable mainstream commentators, but now also the World Bank has repeated the IMF’s recent words of caution in advising delay. What a load of nonsense! My esteemed colleague Kit Juckes characterizes the current consensus thinking as ‘If the Fed hikes, pestilence, plague and never-ending deflation will follow.’ Well even those like me who see a deflationary bust awaiting think the Fed should hike next week – because the longer you leave it, the bigger the financial market excesses become, and the bigger the risk of financial dislocation and global recession ensuing. Have we learned nothing from the 2008 Great Recession? Just get on with it! [Highlights are mine.]" 

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