If America doesn’t want more power, no country is more willing to take it away than… you guessed right!

The Economic Power Button?

Credit: Frédéric BISSON on flickr.

Speculation is rife that the Federal Reserve’s policy meeting tomorrow will occasion the announcement of a rise in interest rates. It’s not speculation because reading today’s news points to that fact.

First, the dollar is very strong and will get stronger. The real exchange rate, not just the nominal one, is also high, propped up by falling oil prices and a weak inflation in the country.

Second, the quantitative easing regime which the European Central bank just kicked in last week will make European corporate stocks very attractive. If the Fed doesn’t raise interest rates soon, investors might push their money towards Europe and they’ll be the loser for it if the euro appreciates in the near future.

As I mentioned before, falling oil prices means the cost of production is falling globally. Too bad for OPEC countries! Profits will soar and there will be more money in the hands of American citizens. Employment is not a big issue; it’s a political advantage for President Obama.

Take a happy workforce with money in their pockets, corporations posting profits and a financial system that is one of the best in the largest economy in the world and there’s only one way to go – hold on to that power.

Holding off raising interest rates might seem a strategic option, but that option will leave Americans with no option but to import goods and more foreign goods. They’d rather export financial assets and make the balance sheets cleaner. On the other hand, raising rates makes American citizens stronger and corporations more competitive.

So, which way would the Fed go: take a hawkish tone and watch as the markets unfold post Eurozone’s quantitative easing, or take the plunge, do what the markets expect? It could be any one’s guess.