Will the Federal Open Market Committee raise the FederalReserve's target rate when it convenes in September—or will itdelay until the year's closing sessions in October and December?With unambiguous forward guidance, the answer to the question wouldbe well understood. As it stands, the Fed has little incentive tomake commitments that would impinge upon its flexibility in settingtimetables. The imagined abstruseness of Fed officials' statementshas given rise to entire industry of contextualizes andsoothsayers.

After a protracted period of inertia by the central bank, thedata upon which the Fed is ultimately dependent are weighing infavor of a move. I would argue this has been the case for sometime. In the early stages of the recovery, prevailing monetarypolicy was an appropriate response to crisis conditions and theirimmediate aftermath. Those crisis conditions no longer exist. As aresult, low yields on the risk-free investment have coincidedincreasingly with an appetite for risk, with the effect of pushingasset prices higher.

While the broad characterizations of the economy and jobs areinconsistent with the current degree of monetary stimulus, marketsremain at odds as to the Fed's next move. Based on the CME's 30-dayFed Funds futures market activity as of last Friday, investors putthe chances of a one-step rate hike in September at 45 percent.There is a 55 percent chance that rates will remain unchanged. Howmuch longer will the Fed hold out? The probabilty that rates willbe unchanged through the end of the year stands at 28 percent.

Want to continue reading?
Become a Free ALM Digital Reader.

  • Unlimited access to GlobeSt and other free ALM publications
  • Access to 15 years of GlobeSt archives
  • Your choice of GlobeSt digital newsletters and over 70 others from popular sister publications
  • 1 free article* every 30 days across the ALM subscription network
  • Exclusive discounts on ALM events and publications
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.

Dr. Sam Chandan

An irreverent take on the macroeconomic environment. Dr Sam Chandan is President and Chief Economist of Chandan Economics and an adjunct professor in real estate and public policy at the Wharton School of the University of Pennsylvania.