Can Fed man up to increase interest rates?

 Though previous situations dictate the Fed will not take any actions against interest rates, there’s a lot more to it.

Several leading economists, including Nouriel Roubini, alerted the Federal Reserve in December when it was on the edge of increasing interest rates for the first time in nearly a decade and claimed that such an action would be too early. Unheedingly, the Fed augmented the rates anyway.

In spite of panic over the global economy, Fed chairperson Janet Yellen said she was “confident about the fundamentals driving the U.S. economy.” Furthermore, a few weeks later, vice chairman Stanley Fischer said that he could see the Fed raising rates four times this year. “We make our own analysis and our analysis says that the market is under-estimating where we’re going to be,” he told CNBC.

Later today, investors wondered whether the Fed is finally willing to pay attention to others.

After the Fed increased rates in mid December, the S&P 500 index has lost eight percent of its value, the Nasdaq composite index has tumbled nine percent, and the Dow Jones industrial average is down 10 percent. These are clear signs that the investors are demotivated and that the economy isn’t nearly as robust as policymakers think.

In order to stop this from happening, the central bankers should respond with one of the four options stated below:

Option 1: Considering recent uncertainty in the market, the Fed should not touch rates
Probability: 50 percent
“After raising rates in December, there is no expectation of a rate rise at this meeting,” said David Kelly, chief global strategist for J.P. Morgan Funds. “Moreover, the Fed will likely acknowledge some of the potential problems caused by market turmoil and re-emphasize its determination to be gradual in raising rates.”

Option 2: Lift rates later when the market is stable, but not now
Probability: 45 percent
The Fed is playing with lot of uncertainty. If Fed officials don’t acknowledge investors’ concerns about the economy, the renowned bond fund manager Jeffrey Gundlach told CNBC that the Fed should deal with the investors’ worry, and “markets are going to humiliate them by further declining.”

However, if the Fed actually take heed to the growing concern of the investors, this will mean they are acknowledging how fragile the market is, which in turn might scare investors away. It happened before in September, “when they didn’t raise rates, citing ‘global financial conditions’ as the main reason,” said John Canally, chief economic strategist for LPL Financial. During the press conference following that meeting, Fed Chair Janet Yellen “sounded overly concerned about global growth, and especially China, and those concerns spooked markets,” Canally said.

Option 3: Raise rates slightly.
Probability: five percent
The Fed being this aggressive is partly due to politics. After being laughed off by the financial press for finally “standardizing” rates in December, the Fed has been pounded lately by second-guessers.

In addition, CNBC’s Jim Cramer recently said: “There were many people who came on our air, over and over again, and told us that a Fed rate hike would be good for the economy. It was good for nothing.”

Though there is a pretty good chance the Fed will not take such criticism seriously, it doesn’t want the critics to think they worship interest rates. In truth, the Fed may use this opportunity to pave the way to another increase in rates, arguing that the economy can withstand another miniscule 0.25 percent point raise.

Option 4: The Fed decreases interest rates.
Probability: Almost zero percent
If, in truth, the world economy is struggling, the Fed may have to go back and cut rates soon. But UBS’s Art Cashin told CNBC that this is not likely to happen today. “They don’t want to yield too much and say, ‘Yes, you’re right, we were wrong,’” he said. “They’re going to fight to maintain what they think is their credibility.”