There’s a major debate brewing in the financial markets, and it concerns the most important potential event of the year for stocks and bonds alike: the timing of a Federal Reserve rate hike. In one corner are the economists. Many of those looking primarily at the state of the recovery say that the Fed will likely raise its key federal funds rate in June.
On the other side are traders, who say that current market dynamics—and prior experience with the central bank—tell them that a rate hike isn’t coming in 2015. What the Fed actually chooses to do, of course, will have a profound impact on financial market, and perhaps on the economy as well. The federal funds rate, a critical short-term rate at which banks can lend to one other, has been kept ultra-low by the Fed since the financial crisis days of December 2008.
Now, many economists expect that the Fed is finally set to shift from ultra-low levels, given the strong state of the labor market. With the unemployment rate declining and payrolls data showing some 250,000 payroll gains a month, “the U.S. labor market is screaming for policy normalization,” as Societe Generale economist Aneta Markowska put it in a recent note.