A Bank of America report has said that a “central bank policy impotency” has hit the Federal Reserve, which is caused by the interest rates being near zero for the last decade. This new report mentioned there was no real quick fix solution to the matter, and it also highlighted why a September rate hike would be unlikely.
If the Federal Reserve now moves interest rates, as it seemed was planned for September, it would really spook Wall Street, which is already going through a rough time. Wall Street just had a horrible week as the markets began nosediving due to the economic situation in China. The S&P 500 fell 3.2 percent on the last day of trading for the week, and since May has fallen 7.5 percent. The Dow Jones Industrial fell 3.1 percent on Friday, leading another day of huge hits in this horrible week on Wall Street. Michael Hartnett, who works for Merrill Lynch Global Research Unit said in a report that the mood this summer for investors seems a lot darker as there continues to be a decline in commodities, and the emerging markets have led to a widespread loss in equities within the past few weeks. The stocks have fallen 2.6 percent worldwide in just one month. So far this year, bonds have decreased 2.5 percent and the return on stocks has only been 2.3 percent. Bank of America is still advising some more riskier higher-yielding assets you might want to add to your portfolio, but there are a couple catches to this. One being the Federal Reserve policy and the other being the devaluation of China, and just last week China went ahead and devalued the currency by 2 percent. This means that in America, it can have a huge hit on manufacturing and exporting. There is already American inventories outpacing the sales, and this might lead to over supply.
The issue with the Federal Reserve is that there was supposed to be a September rate hike on interest rates, at least that was the more probable outcome. With the news in China and in the Eurozone, as well as the oil prices continuing to fall rapidly, it is looking like the September rate hike might not happen after all. Most of the investors and traders are now suspecting the interest rate hike will be put off until December, just to give everything time to cool down and see where the market is before making the first hike in nearly 10 years. The Federal Reserve also just released minutes from the July meeting, which was before the situation in China happened, and even then the Feds were looking at China and Greece and considering how these world problems would affect the decision to raise the interest rates. Some say though that the Federal Reserve should still raise rates in September, since that would look like the agency has faith in the American economy not to fall or stumble over the latest news around the world, and it might have a more positive impact than negative one. After the previous financial crisis, investors have started to look to the Fed and the actions of the Fed in regard to how the economy is going, because the “power of the central banks” is what really leads the economy. Investors have said that the Fed would be insane to raise the rates in September, but there is disagreement about this, and other investors believe it would be a good thing. For now, with only a couple weeks until the beginning of September, it looks like there might be another delay in raising the interest rates, and this might not be a bad thing. This would be the first rate hike in several years, and the Fed has already said multiple times that this cannot be a rushed decision, and every precaution needs to be taken to ensure that it will not destabilize the economy of America. Janet Yellen is expected to speak this week, which would probably be when an announcement will be made about the interest rate hike, and if it is for sure going to happen or if it is being delayed, so keep an eye out for her conference this week to hear more.