This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Here's Why Rates Will Rise Sooner Than Investors Anticipate

NEW YORK (TheStreet) -- Five years into the economic recovery and the most pertinent question in the market remains when will the Federal Reserve raise interest rates that have lingered near zero since late-2008.

A rate hike would most likely ripple through equity, commodity and bond markets in the U.S., Europe and throughout the world's emerging economies. Simply put, when the Fed hikes rates, virtually every asset traded on the globe will shift one way or another.

WATCH: More market update videos on TheStreet TV

Investors, then, are left trying to parse the Fed's policy statement against the split among the central banks members about when and by how much to increase rates.

The official Federal Open Market Committee's statement on June 18 said the central bank will keep rates at current low levels for a "considerable time" after it completes its economic stimulus program. A majority of FOMC members expect the fed funds rate to remain at 1% or lower through 2015 while the second-largest group foresees rates rising to between 1% to 2% next year.

St. Louis Fed President James Bullard is among those pressing Yellen and the bank to move up its timeline. Bullard on Thursday told reporters in New York that the central bank should deliver its first federal funds rate hike at the end of the first quarter of 2015.

"I did consider the pros and cons of moving that [target]," Bullard said. "Some of the things I'm saying today sound pretty optimistic about the economy, but we also have this negative first quarter, which was a vexing issue, and when I weighed those two I said, 'Well, maybe I'll just leave it at the end of the first quarter.'"

Bullard was referencing the final reading on first-quarter 2014 GDP, which contracted by 2.9% -- the worst quarter since the first quarter of 2009. The consensus appears that central bankers expect to hike rates sometime in 2015, but that assumes economic data doesn't take unanticipated turns.

So where should investors be looking?

"What matters is these inflation numbers," Robert Brusca, chief economist at FAO Economics, said in a phone interview.

Core personal consumption expenditures, measured by the Commerce Department, is up 1.5% year-over-year and the core consumer price index is up by 1.9%. With the Fed's inflation target at 2%, it suggests that inflation pressures are building. If inflation pushes past 2% it would force central bankers to consider raising rates.

Simply, if inflation rises soon, the Fed would have to counter that move with an increase in the fed funds rate.

"First quarter 2015 seems quite right. Could be sooner if inflation data misbehave worse," Brusca said.

Stocks rose and gold popped on June 18 after Chairman Janet Yellen held her quarterly press conference, suggesting that investors think the Fed won't raise rates until at least late 2015.

But a hint of rising inflation and growing support among key Fed officials to push rates higher sooner may cool off the market.

-- Written by Joe Deaux in New York.

>Contact by Email.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $93.74 0.00%
FB $117.58 0.00%
GOOG $693.01 0.00%
TSLA $240.76 0.00%
YHOO $36.60 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs