Speculation is running rampant about what the Fed will do Thursday. I truly can see things going either way with the rate increase. So let me instead tell you what I would do if I were in charge.
Raise rates 1/8% (half the 1/4% normal increase).
This sends a very positive message to investors.
First, and most importantly, that the Fed is very confident in the strength of the US economy and is comfortable normalizing rates at this time. That is a very bullish message.
Second, that this smaller than normal increase is proof behind their statement that they will go slow and steady with increases as not to disrupt the health of the economy. This should calm those who typically believe the Fed is too aggressive.
Third, send a clear message to traders that they don’t call the shots and the Fed will not bow to their unreasonable demands. Instead the Fed will do what is right for the greater good.
Truly traders are like petulant children screaming for more candy and ice cream. Sometimes they need less treats. And sometimes they need an adult to provide some clear direction and discipline of what needs to be done. Now is such a time.
Fourth, this move erases one more question mark from the investment equation. And it will stop investors from focusing on an issue which is nothing more than a side show. Instead we need to get back to the main event, which is an emphasis on economic signals and how it affects corporate earnings and the true value of stocks.
Unfortunately I don’t call the shots. So let’s see what unfolds when they announce Thursday at 2pm ET.
Just remember that the initial reaction is often not the lasting effect. Like I said, traders are like children. So they could throw a tantrum that gets smoothed over when cooler heads prevail. Or they could have a premature celebration that gets quickly swept away.
Just stay focused on the main event, which is the health of economic data.
aka Steve Reitmeister
Executive Vice President, Zacks Investment Research