What Would Happen if the Federal Reserve Doesn’t Raise Interest Rates?

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By Jacob Maslow

Federal Reserve Building Close up of EagleThe interesting thing about the current market anxiety on the US Federal Reserve’s interest rate hike moves is the fact that it might actually cause more harm to the market if the US Federal Reserve doesn’t raise rates. You have to understand that the reason why the Dow Jones industrial average seems to be seesawing three digits up and down is because of the fact that investors are looking for signs to exit the market.

It is no mystery that a lot of market players made a tremendous amount of paper profits over the past few years. A lot of these hedge fund managers are looking to cash in on their profits. Currently, these are just paper profits. They are unrealized gains. Investors would only realize these gains once they leave the market. That is when they turn paper profits into cash profits. That is how and when profits become real.

The problem is nobody wants to miss the party. If the US Federal Reserve doesn’t raise interest rates, the big fear among many investors is that the market would continue to rise without them. In short, they would miss the party. The problem with this thinking is that the market is inflated primarily due to the fact that there is so much cheap liquidity flooding financial markets due to central banks’ stimulus schemes. In short, a lot of these paper gains are artificial. We are left with a situation where people who should have cashed out are looking for even more paper gains by trying to wait out the market’s direction. This is a serious gamble.

The reality is that the US Federal Reserve may do greater harm to the economy by waiting longer to raise interest rates. Why? Its failure to hike rates would blow more air into the already overextended market bubble. It is only a matter of time until a black swan event or an unforeseen external force crashes the market. Maybe by raising interest rates, this would put a brake on the speculation, and some sort of sense of reality would kick in. I am, of course, talking about some sort of soft landing where the Dow Jones industrial average could start cruising downwards while the US economy continues to coast upwards, slowly yet on solid footing. This is the best case scenario.

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