Hissy Fit, Part 2; Does The Fed Have The Guts To Do It?

We wrote about the concept of the market throwing a "hissy fit" back in the summer over the prospects of the U.S. Federal Reserve Open Market Committee's (FOMC) decision to raise the target for the Fed Funds Rate.  

At the time it was expected that the Fed would hike the target rate in September but the weakness in the market (translated at the Fed to potential weakness in the economy) clearly spooked the Fed enough to keep them on hold.  As such, the expected September rate hike never happened.

Next week, December 15th and 16th, the FOMC will meet again to determine the Fed's target for short term interest rates.  It is now widely believed that they will vote to raise the target from 0% to .25%.  

Hardly a massive move up, but once again, the market seems to be throwing another hissy fit and, frankly, it is just not all that surprising.  There is a prevailing view in financial circles that the market has only been propped up in recent years by a very loose Fed policy on interest rates and that "taking the punch bowl away" will send the economy, and thereby the market, into a tailspin.  Clearly, market forces are testing the Fed in this moment of decision.  What will the Fed do?

Well, the Fed may have backed themselves into a corner by waiting so long to end the "zero interest rate policy" (ZIRP), and we have discussed this before.  But since looking backwards is never a fruitful endeavor, we certainly hope they will get on with the task of normalizing monetary policy and allow the world to move on from the "crisis" footing that it has been on for seven years now.  

Does the Fed have the guts to make this change in policy?  We shall see.  But we would not be surprised to see a rally in markets on the announcement of an increase in the rate target. How far and how fast the Fed ultimately goes will then become the point of focus for the markets, but getting on with the task is a major step, and one that is long overdue.