Interest rate prediction thread



Today is the big day. At 2 PM the Federal Reserve will announce if there is any change to the current monetary policy (Zero Interest Rate Policy, or ZIRP). Rates cannot go lower, and 1/2 point is almost unthinkable. So the two main possibilities are that they leave rates alone or hike 1/4 point.

The market clearly believes they will leave them alone. I agree:

- In my view, the primary purpose of monetary policy is to control the amount of money in circulation. There is practically no inflation in the economy, which suggests that the money supply is low. 1/4 point wouldn't have a dramatic effect on the money supply, but it would send a signal that the fed is so anxious to get away from ZIRP that they will raise rates despite the very low rate of inflation

- The biggest argument for raising rates is that is allows you to cut them again if growth slows. But growth is already slow. If growth slows more, we will need more quantitative easing and more government spending. No two ways about it.

- There are positive signs in the economy that suggest we might see inflation return before too long (housing starts, new unemployment applications). Why raise them now? Wait until it's appropriate.

So my prediction:

No change to interest rates. ZIRP continues.