Russ explains why he believes a rate hike in mid 2015 is the most likely scenario.
Recent economic news were generally positive, with the highlight being a strong Q3 GDP growth rate. In response, many investors are wondering if the positive data means that the Federal Reserve (the Fed) will soon begin hiking interest rates.
Market Realist – The US economic recovery is well on track
The graph above shows the GDP (Gross Domestic Product) growth rate in the US since 2012. In 3Q14, GDP grew by 5% on an annualized basis. This is a 11-year high. This was followed by an annualized 4.6% growth in 2Q14, albeit on the back of a contraction of 2.1% in 1Q14.
These statistics prove that the US economic recovery is truly on. This is great news for the US stock markets (SPY), which went up after the news. Most analysts expected the third quarter growth to be around 3%.
Although the US GDP growth rate has been robust, all is not hunky-dory elsewhere. Global stocks (QWLD), especially developed market stocks (EFA), have been slipping due to poor growth in these countries. Europe (EZU) barely kept its head above water in 3Q14, while Japan (EWJ) slumped into recession.
The US seems to be far ahead of other economies in terms of recovery. Another example of the gulf between the US and other developed markets is that while the US could hike interest rates soon, other economies are either contemplating, or have already implemented the quantitative easing program to support their respective economies.
However, the Fed could keep interest rates low for longer. The next few parts of this series explain why.