What Happens If The Fed Raises Rates?

Tomorrow might well be the single-most anticipated Federal Reserve announcement in nearly a decade. Will it or won’t it raise interest rates?

It’s almost like the Catholic world awaiting white or black smoke from the Vatican chimney to announce that a new pope has — or has not yet — been elected.

The only practical difference is that one decision speaks to heaven … and the other is just a reminder that we’re all on a handcart to hell, no matter the decision made.

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Do not be surprised if tomorrow, just after the Fed’s 2 p.m. announcement, Wall Street rallies — possibly significantly.

I see this rally happening for one of two reasons:

The Fed does not raise rates. It will say in its announcement that while the U.S. economy is looking healthier and the jobs market is progressing nicely (a lie, as I showed in a previous dispatch), Fed governors are nevertheless concerned about instability globally, a not-so-oblique reference to China.

The Fed does raise rates … but it raises by less than 0.25%. It will say in its announcement that the U.S. economy warrants a small move higher, but that the global economy is still fragile and the Fed doesn’t want to upset the apple cart by being too aggressive with its rate-hike cycle. Moreover (and this is the part that engenders a stock-market rally) the Fed will effectively say “That’s all folks!” The governors will have given the world what the Fed promised — a rate hike by the end of the year — but it will send a strongly worded message that no further hikes are in the offing for a long time.

Which of these two is most likely? And what happens if the Fed raises rates?

It’s a crapshoot, since divining the mood of the Fed is black magic at best.

Still, I lean toward Option No. 1.

The Fed, though focused on what’s best for the U.S. economy, cannot disregard the impacts a decision to raise rates will have on the global economy … and a rate hike would have meaningful impacts.