Will the Fed Raise Interest Rates?

FOMC meeting todayThe biggest Fed question on investors' minds remains "Will the Fed raise interest rates?" - and their next chance to do so is at next week's two-day policy meeting that ends Sept. 17.

This year, the Fed has been adamant about raising interest rates for the first time since 2008. As recently as July, it looked to be almost certain the rate hike would occur in September.

That is, of course, until the market hit an extreme patch of volatility in August.

Thanks to worries about China's stock market, the Dow Jones fell 13.4% from July 20 through Aug. 25. The Nasdaq and S&P 500 were down 13.5% and 12.2% in the same time frame, respectively.

Now, there is a division among U.S. Federal Reserve officials on whether to raise rates next week, according to The Wall Street Journal.

Those calling for increasing interest rates point to the U.S. job market. The U.S. jobs report from August showed that unemployment in the United States hit 5.1%, a seven-year low. At the same time, job openings hit 5.8 million in July, showing an increased need for workers.

One of the arguments against an interest rate hike, however, is hourly wage growth in the United States. According to The Washington Post, hourly wage growth has grown at roughly 2% annually since the 2008 financial crisis. However, Yellen has previously stated that a 3% to 4% growth rate was more optimal.

Those looking for an answer to the question "Will the Fed raise interest rates?" likely won't receive one until the actual meeting. Fed officials have now entered their self-imposed blackout period, when they cut off communication with the media ahead of the meeting.

And while the September interest rate increase is in question, there's still a chance the Federal Reserve hikes rates at some point in 2015. Fed officials will meet again in October and December. A small hike should occur at one of the three meetings.

For investors, here's what that means for stocks...

Will the Fed Raise Interest Rates and What Does that Mean for Stocks?

According to Money Morning Capital Wave Strategist Shah Gilani, the Fed will feel pressure to raise for rates soon simply because they've been touting the hike so long.

However, when the rate adjustment actually occurs, the market shouldn't be too turbulent.

"There shouldn't be too much of a market reaction to a rate hike," Gilani said. "A rate increase of 0.25% in the Fed funds rate has already been talked about for so long that it's mostly baked into prices now."

As Gilani points out, any raise in the interest rates will be a small one - likely 0.25%.

"And beyond that 0.25%, there's no need to hike further," Gilani said. "The Fed isn't going to destroy the wealth effect it's engineered by doing something stupid to trounce stocks. That said, there is a chance investors could look at a rate hike as a profit-taking opportunity and sell stocks. But this won't be a market buster."

If the market pulls back slightly following a rate increase, it's not a reason to panic. The Fed raising rates won't cause a major sell-off. And if the Fed should raise rates a second time, that's actually a good thing for the markets.

"The thing to remember is that after the initial rate hike, which is a matter of Fed credibility at this point after telegraphing it for so long, any additional rate hikes will be because we are growing nicely. That's a good thing for stocks."

The Bottom Line: For those asking "Will the Fed raise interest rates?" there is no clear answer still. A rate hike appeared certain until the market's recent stretch of volatility. If the Fed does raise rates in September, you can expect to see stocks dip a little, but there won't be a major sell-off.

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