It's been almost a year since the U.S. Federal Reserve last raised rates in December 2015.
And now many investors want to know: Will there be another December Fed rate hike in 2016?
We'll answer this question in just a moment. But before we do, here's why the Fed has kept rates so low for so long...
Why the Fed Has Kept Rates Low for Nearly 8 Years
Never before in the history of the United States have Fed interest rates been kept this low for such an extended period of time.
The Fed has tried to stimulate the economy with almost a decade of near zero-interest-rate policy (ZIRP). It has succeeded, albeit at a very slow pace and at a significant cost to the economy. Since 2008, the U.S.' annual gross domestic product (GDP) growth has averaged just 1.2%.
By maintaining ZIRP for so long, the Fed also overheated the economy. It has inflated the stock market to record highs (despite subpar earnings growth), undermined economic growth, fattened banks' balance sheets, and forced other central banks around the world to follow the Fed's crazy policies. That's according to Money Morning Capital Wave Strategist Shah Gilani.
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You see, the Fed has been running out of ways to stimulate the economy. Lowering interest rates used to be an effective way to mitigate an economic recession. But after being overused, the same policy tool hasn't been as effective. That's why the Fed has kept ZIRP going for so long...
Now, the Fed has another chance to raise rates again in December. The economy is in good enough shape for a Fed rate hike. And the election victory of Donald Trump has sent the Dow Jones Industrial Average soaring to record highs.
Here's what we now know about a possible December Fed rate hike...
Is a December Fed Rate Hike on the Table?
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According to the CME Group's FedWatch Tool, the markets are pricing in a 90% chance of a Fed rate hike in December.
Like last December, the rate hike would only be a paltry 25 basis points. That would shift the target rate to between 0.50% and 0.75%.
The Fed knows it needs to raise rates sooner rather than later. That's because it's been nearly a decade since the last recession. And the economy is well overdue for a contraction...
If the Fed keeps ZIRP going as the next recession hits, it won't have the ability to cut rates and stimulate the economy. In other words, the Fed needs to raise rates now so it can lower them again later.
"By making an interest rate hike in December, then in 2017, they'll have a few extra levers to pull to be able to respond to some negative economic event," Money Morning Technical Trading Specialist D.R. Barton said in a Facebook Live event.
Below is Barton's full commentary on the timing of the next Fed rate hike - and how you can prepare:
Lastly, other economic indicators the Fed cares about have been improving, which helps the case for a rate hike. They include:
- Spending: The Fed says that household spending has been "rising moderately." Consumption represents about 68% of the U.S. economy. So for spending to be rising, that shows that both the economy and consumers could handle a small rate hike.
- Unemployment: The national unemployment rate is holding steady at 4.9% and has been trending downward from 5% since the last Fed rate hike in December 2015. This is another reason to raise rates.
- Inflation: The Fed expects inflation to rise to 2% over the "medium term." The Fed also understands, however, that inflation is a lagging indicator and tends to have a delayed effect. So it's in the best interest for the Fed to raise rates now to dampen inflation rate growth. The current U.S. inflation rate is 1.5% as of September (the latest data released).
Taking all three of these indicators into account, as well as the markets' expectations, a Fed rate hike in December seems inevitable.
Up Next
A Fed rate hike in December will affect many investments, from stocks to Treasury bonds.
That's why we've developed a four-point strategy to protect and grow your money as interest rates rise.
Check out our free guide, right here...