Why the Fed Did Not Raise Interest Rates

The chart below is the Weekly Leading Index (WLI) from 1988 to 2015.  The WLI is prepared by the Economic Cycle Research Institute (ECRI) and is a weekly representation of the economic activity in the US.  I have marked with red arrows each time the Fed began a policy of raising interest rates.  The blue arrows signify each time the Fed reversed course and started lowering rates.  The green line is a long term moving average.  Also on the chart are the three periods of Quantitative Easing (QE).

Here are some items on the chart to note:

1. Every time the Fed began to raise rates, the WLI was above its moving average, and therefore in an uptrend.  

2. Many people say that QE did not help the economy.  It may just be a coincidence, but as the yellow highlighted areas show, the WLI (and by inference the economy) increased when QE was occuring and immediately decreased when QE ended.  

3. The last time the Fed started a cycle of interest rate hikes was in 2004.  

4. The WLI is now below its moving average and seems to be weakening.  

I believe the Fed did not raise interest rates because the economy is not very strong right now.  Yes, China’s weak economy might have played a role, but our weak economy played a bigger role.  Until the WLI is in an uptrend again, the Fed will continue to wait on raising rates.  You can follow the WLI by going to www.businesscycle.com.