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Fed Increase for Wimps: Economists Propose 1/8-Point Rate Rise

Fed Increase for Wimps: Economists Propose 1/8-Point Rate Rise
(Dollar Photo Club)

Tuesday, 15 September 2015 07:48 AM

There’s a more palatable option for those investors too wimpy to stomach the quarter point increase in interest rates from the Federal Reserve that may come this week: A 12.5 basis points shift.

As the Fed’s “will it, won’t it?” debate over tightening monetary policy enters its final hours, economists from ING Bank NV, UniCredit SpA and VTB Capital Plc suggest the novel increment would show the Fed is balancing the needs to respond to an improving economy while minimizing market disruption.

“It would certainly be unusual, and surprising, but then after the last eight years or so of unconventional monetary policy, unusual is becoming the norm,” ING economists said in a report to clients on Tuesday.

At VTB, global strategist Neil MacKinnon says a 1/8 percentage point increase — which would be the first such move since December 1986 — should be accompanied by a signal from Chair Janet Yellen that the Fed will act again in October if the initial shift has proved acceptable to markets.

Erik Nielsen, chief economist at UniCredit SpA, says the Fed just needs to get on with it or risk falling further behind the curve.

“Skipping September will raise the risk of more turmoil,” said Nielsen. “Since it is all about signaling now, I would hike on Thursday by 10 to 15 basis points.”

Tip-Toeing

Like MacKinnon, he reckons the Fed could then assess the response in financial markets and complete the “normal” 25 basis point shift when its officials next set policy on Oct. 28.

The case for tip-toeing is that it would reinforce Yellen’s pledge that the Fed is driven by economic data as the labor market tightens with unemployment now at its lowest in seven years.

At the same time, a smaller-than-normal increase would test the waters of the market without unduly roiling them and underscore the Fed’s other vow that it will raise rates cautiously. Officials would also have less to cut if the economy did suddenly swoon and always have room to speed up increases later if it accelerated.

Ultimately, the Fed was unorthodox in easing monetary policy so also may be in tightening it.

“The interest rate environment since 2007 has been very different,” MacKinnon, global macro strategist at VTB in London, told clients in a report on Monday.


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There's a more palatable option for those investors too wimpy to stomach the quarter point increase in interest rates from the Federal Reserve that may come this week: A 12.5 basis points shift. As the Fed's "will it, won't it?" debate over tightening monetary policy enters...
fed, rate hike, economy, yellen
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2015-48-15
Tuesday, 15 September 2015 07:48 AM
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