It All Comes Down To This

After months of speculation, debating and postulating, the Federal Reserve will hold their two-day Federal Open Market Committee confab to make their decision on raising the overnight “Fed funds” rate.

Morgan Stanley postulates four potential outcomes. To wit:

A Hawkish Pass (60% Probability): The Fed passes on liftoff in September, citing the recent tightening in financial conditions, while keeping the door open for liftoff at the October or December meetings.

A Dovish Pass (30% Probability): The Fed passes on liftoff in September, citing both the recent tightening in financial conditions as well as a lack of confidence that inflation will move back to 2 percent over time.

A Dovish Hike (9% Probability): The Fed hikes rates at the September meeting, but strengthens expectations for a gradual path thereafter by significantly lowering the 2016 and 2017 dots, introducing 2018 dots that are below the longer-run dots, and further lowering the longer-run dots.

A Hawkish Hike (1% Probability): In this scenario, the Fed would hike at the September meeting while not decreasing the expected pace of hikes in 2016 and 2017 very much.

This outlook very much corresponds with my own recent analysis where I have suggested the data simply doesn’t support hiking rates now.

“The Federal Reserve raises interest rates to slow economic growth to keep an economy from overheating which would potentially lead to a sharp rise in inflationary pressures. Since commodities are the basis of everything that is bought, consumed or other utilized; if there were indeed inflationary pressures on the rise commodity prices should be on the rise. As shown, this is clearly not the case.”

Commodities-GDP-072215

“In fact, declines in commodity prices have historically been associated with declines in economic activity as shown in the highlighted boxes. While not every decline in commodity prices led to a recession, and I am not making that case, there is a high correlation between the ebb and flow of commodity prices and economic activity, as would be expected”