There’s a more palatable option for those investors too wimpy to stomach the quarter point increase in interest rates from the Federal Reserve that may come this week: a 12.5 basis point shift.
As the Fed’s “will it, won’t it?” debate over tightening monetary policy enters its final hours, economists from ING Bank NV, UniCredit SpA and VTB Capital Plc suggest the novel increment would show the Fed is balancing the needs to respond to an improving economy while minimizing market disruption.
“It would certainly be unusual, and surprising, but then after the last eight years or so of unconventional monetary policy, unusual is becoming the norm,” ING economists said in a report to clients on Tuesday.
At VTB, global strategist Neil MacKinnon says a 1/8 percentage point increase -- which would be the first such move since December 1986 -- should be accompanied by a signal from Chair Janet Yellen that the Fed will act again in October if the initial shift has proved acceptable to markets.
Erik Nielsen, chief economist at UniCredit SpA, says the Fed just needs to get on with it or risk falling further behind the curve.
“Skipping September will raise the risk of more turmoil,” said Nielsen. “Since it is all about signaling now, I would hike on Thursday by 10 to 15 basis points.”
Like MacKinnon, he reckons the Fed could then assess the response in financial markets and complete the “normal” 25 basis point shift when its officials next set policy on Oct. 28.
Guy Lebas, managing director at Janney Montgomery Scott LLC in New York, goes as far as to attach a 40 percent probability of a “micro hike” this week.
The case for tip-toeing is that it would reinforce Yellen’s pledge that the Fed is driven by economic data as the labor market tightens with unemployment now at its lowest in seven years.