Rate hike: sooner rather than later?

The Fed announced no changes to interest rates today and made only modest adjustments to its commentary (see No surprises from Fed...). Following in the path of former Chairman Alan Greenspan, Ben Bernanke is not one to surprise financial markets and shifts in policy tend to be telegraphed in advance.

Note that even the language that conditions "warrant exceptionally low levels of the federal funds rate for an extended period" remained in the statement despite talk from analysts that the FOMC would tweak the language as it eventually prepares to raise interest rates.

If we are going to see changes at the December meeting, we are more likely to hear talk from Fed officials in speeches in the upcoming weeks, rather than get blind-sided at a Fed meeting.

That said, it might have been beneficial for a change in the language referring to rates and an eventual hike at the December meeting to 25 bp followed by another small increase to 50 bp in January.

Yes, the economy remains in a fragile state, and the unemployment rate is probably headed higher. Moreover, political pressure from lawmakers for the Fed to continue doing much of the heavy lifting remains intense. Plus, the protests from the executive and legislative branches would probably be deafening.

However, a symbolic increase would not harm the economy, in my my view, as rates would still be near rock-bottom levels. And the emergency situation and free-fall in the economy late last year that brought about near zero interest rates has abated.

A small increase would help attract the capital needed to fund large deficits and would send a strong message to international investors that the Fed is serious about the Treasury's strong dollar policy. Furthermore, it may slow some of the asset inflation we've been seeing in the commodity markets.

Do I anticipate this will occur? Highly doubtful. Bernanke & Co. will most likely hold the fed funds rate at its current target of 0-0.25% until job creation is on a self-sustaining, upward path.