NEW YORK (TheStreet) -- Stock market investors and traders are fretting about whether Federal Reserve policymakers will raise interest rates by 25 basis points or stand pat at their meeting this week.
There's a third option, though. Instead of making a conventional 25-basis-point move, the central bank could keep the upper limit of its current interest rate target range unchanged at 0.25% but bump up the lower limit to 0.125% from zero. (A conventional move would bring the target range to 0.25% to 0.50%.)
This would allow the Federal Open Market Committee to "move off zero" and raise rates slightly without actually changing policy. It might reduce some market anxiety without causing a disruption in currency trading. (It is widely believe that a rise in U.S. interest rates will cause the dollar to strengthen further.)
The genesis of the idea for this third option is that the Fed has had several opportunities to raise rates over the past year and a half but hasn't. Although policymakers are probably now convinced they should raise rates, they have become hostages of the markets and, to a lesser extent, political influences.
This week's FOMC meeting, which ends Thursday, comes against a complex economic backdrop that complicates the case for a conventional 25-basis-point increase in the Fed's target for the federal funds rate. Stronger-than-expected U.S. labor market data and overall positive domestic economic news are arriving at the same time as weak global growth, increasing risks of unrest in Europe as a result of the refugee crisis and an accelerating draw down (redemption) of dollar-denominated debt from emerging-market nations including China. Thus, there is good reason to vacillate between "raise and not raise."
The fractured outlook for economic growth around the globe, with data continuing to improve for the U.K. and the U.S. while getting worse for Asia and South America, is at the root of the conundrum for the Fed right now.
Generally speaking, investors should expect continued market volatility through Thursday and probably beyond. The aforementioned third option could allow the Fed to move off zero without sending the markets into turmoil.
- Why it's so hard for the Fed to raise interest rates.
- The good, bad and uglyoutcomes on higher interest rates.
- Everything you wanted to know about the coming Fed rate increase.
- Three things the Fed may do at its meeting this month.
- What the Fed is watching in the economy before it makes a decision.
- Why the Fed should be raising rates now.
- What happens when the Fed raises interest rates.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.