Six Reasons Why a Fed Rate Hike Is Unlikely

As the FOMC heads gather to discuss the fate of the US economy, will they grant the markets an interest rate hike? I doubt it! Here are six reasons why they’re unlikely to increase rates:

1. Economic Growth? Weak!
The US posted a feeble 2.4% GDP growth for the second quarter of 2010, much less than the 3.7% economic expansion seen during the first quarter. Components of the report showed that sluggish consumer spending, which slid from 1.9% to 1.6% during the period, was the primary culprit for weaker growth.

It doesn’t help that consumers are staying tight-fisted with their Jacksons (I’d say Benjamins, but there’s just no money to go around!). Apparently the savings rate surged to 6.4% recently, its highest level in a year, reflecting how Americans are less willing to spend. I wonder why…

2. Labor Pains
Aha! Now this could explain why Americans would rather keep their hands in their pockets: Last week’s NFP report revealed that the downturn in employment was much weaker than expected.

Payrolls dropped by 131,000 in July, more than twice as much as the projected 63,000 decline. Although the unemployment rate held steady at 9.5%, it was merely because the decrease in the labor force made the increase in joblessness appear much smaller.

Aside from that, the June employment figure was downwardly revised to show that companies shed 221,000 jobs during the month, almost double the previously reported 125,000 figure! That just goes to show that the US labor market is still far from stable and that this shaky labor situation could put a drag on economic growth.

3. Rocky Housing Market
Because of uncertain job opportunities and the expiration of homebuyer tax credit in April, more and more average Joes are savin’ up instead of living the American dream and buying their own cribs.

This was probably why pending home sales dropped by 2.6% in June. That’s a 20% fall in 12 months! House prices also continue to plunge to record deeps, while existing home sales, which makes up 90% of the housing market, also slipped by 5.1% in June.

Obama’s extension of the homebuyer tax credit better do its job fast! After all, if the housing market hits rock bottom, we just might see more Americans living with their mommas a little longer. Uh-oh.

4. Deflation Expectation
Weak economic growth has been raining on the US economy’s parade since the start of 2010. Insults were added to the big injury when producers cut their prices by 0.5% in June, and the consumer price index, a common measurement of inflation, printed its third consecutive monthly drop by 0.1% in the same month.

Now, analysts are saying that there’s a 25% chance that the US will experience either a double-dip recession or deflation. Talk about being in between a rock and a hard place!

Apparently, the continuous fall in prices also makes consumers want to hang on to their moolah. Without spending, companies would also join the saving frenzy and refuse to spend on investments, labor, and production. This would weaken the stimulus in the economy and give the US government a big headache.

5. Play More Sims
No, I’m not referring to the computer game. According to Nobel Prize-winning, uber nerd (I mean that in a good way!) economist Joseph Stiglitz, the US economy even needs more stimulus. He pointed to the growing weakness in the labor market as a sign that current measures in place just aren’t getting the job done (No pun intended… okay fine, it was. Ha!).

Stiglitz said that new, “better designed” measures will need to be implemented in order to truly stimulate growth down the line. He added that any new stimulus should focus on education, technology, infrastructure and investment. Without more stimulus, Stiglitz said that the US growth would remain weak like Lebron’s decision to join the Heat (Oooh burn! Get it? Heat, burn…I’m on a roll today!).

6. Take a Look Around
Lastly, the US should recognize that while they may still be considered to be one of the hotshot economies, it can’t go through a recovery by itself. And it’s not like other countries are showing strong signs of recovery on their part as well.

Australia and New Zealand, two countries whose central banks have already raised rates earlier this year, recognize that there is still a lot of underlying weakness around the globe, which is why they’ve decided to pause on further rate hikes. China has also taken measures to curb growth to avoid inflationary pressures. And while ECB President Jean-Claude Trichet‘s latest statement brought up the idea that the euro zone may just be over the hump, who knows when the debt concerns will flood the market yet again!

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Oh boy, things seem to be looking a lot less sunny lately! Even though Fed head Ben Bernanke recently pointed out that some sectors of the US economy are showing signs of hope, I still doubt that he’d give the go-signal for a rate hike anytime soon. We all know how cautious the Fed can be!

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