The tentative budget deal reached in Washington D.C. gives Federal Reserve policy makers the green light to hike interest rates in December, according to one strategist. Aaron Kohli, interest rates strategist at BMO Capital Markets, thinks the Fed is on hold this week, but is expecting a move in December.
Kohli points out the budget agreement between the White House and Congressional leaders removed a stumbling block that might have prevented the Fed from raising rates later this year.
"I think it's important to remember that not having a budget in place would have actually shut down a lot of the agencies that collect the data that the Fed needs, so it may have postponed the Fed for much longer than even December," said Kohli. "And so removing that barrier I think makes it much more likely that you'll see a hike by year end."
Kohli believes that in the statement released at the conclusion of the Fed's Open Market Committee two-day meeting, the Fed will have to strike a delicate balance, weighing economic strengths and risks.
"The Fed has a very difficult tightrope to walk," said Kohli. "They have to balance a hawkish assessment of the economy, and keep the door open for a December hike, while at the same time making sure that they acknowledge the strengths that the economy has shown and some of the potential risks as well."
According to Kohli, those risks include a slowing economy in Europe and China, which has strengthened the U.S. dollar.
"One of the things the Fed has to keep in mind is how much of that dollar strength to take into account," he said.
Kohli also acknowledged that with the economic recovery several years old now, the Fed must also prepare for another risk -- a potential economic slowdown.
"It's one of reasons that the Fed wants to hike. I know it sounds a little counter intuitive, but it's the one method that gives themthe most ammunition to cut again if they need to in 18 months."
FOMC policy makers will announce their policy decision on Wednesday afternoon.