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Investors can pay now for Fed rate hike, or pay more later

Janet Yellen, chair of the U.S. Federal Reserve. David Rosenberg believes believes the Fed has become too preoccupied with not upsetting the market in the short term rather than thinking about its long-term strategy.

If the U.S. Federal Reserve leaves interest rates unchanged at its Wednesday policy meeting not surprisingly, it will please lots of equity investors who have greatly benefited from the central bank’s zero rate of interest policy over the past six years.

But in other words the old oil filter commercial: Investors will pay now, or pay later.

The Fed’s ongoing reluctance to raise rates might end up doing more harm than good since the longer it waits, the more damage it might foist on stock markets even if investors believe the opposite.

\”Despite [that] commonly held view, I believe that the Fed standing pat on zero and kicking the can in the future on rate hikes may not be such a positive thing in the long term,” said Michael Arone, chief investment strategist at State Street Global Advisors, inside a note to clients.

The U.S. central bank\’s Federal Open Market Committee (FOMC) will release its latest policy statement on Wednesday following two days of deliberation in Washington.

Most economists predict the FOMC will again stand pat on interest rates, with most forecasting a high quality hike in September.

Arone said many policymakers and market observers believe the chance of the Fed raising rates too early exceeds those of moving past too far, pointing towards the premature rate hike in 1937 that exacerbated the truly amazing Depression to support their view.

\”So far now, it seems the very last thing the Fed wants is to repeat that mistake and boost rates prior to the economy are designed for it,\” he said. \”In recent years, the Fed has repeatedly moved its goal posts, seemingly to avoid raising the government funds rate from near zero.\”

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