With Rate Hike In Play, Markets Uncertain

This week, New York Federal Reserve President William Dudley hinted that there was a good chance that the Fed will raise interest rates in September, giving investors reason to proceed with caution.

The bank's policy tightening has been in focus for the past year with investors hanging on Fed officials' every word in hopes of correctly predicting its next move.

Data Driven

Dudley remarked that he wouldn't be shocked if a rate hike took place in September, though data could cause the bank to hold back. Fed Chair Janet Yellen has promised that the bank's policy will be data driven and that the bank will be cautious with its interest rate increases.

Softer than expected data in the first quarter gave investors reason to believe that the bank would wait to raise rates, but Dudley said that recent figures for household spending and income have been strong and support a positive economic outlook.

Related Link: Will The Fed Heed IMF Policy Advice?

Uncertain Future

Many worry that markets won't be able to withstand the Federal Reserve's rate hikes once they begin. The Bank for International Settlements warned on Sunday that the global economy's reliance on monetary policy has created a dangerous environment for markets.

The Swiss organization said that in many countries, monetary policy has been used to pad demand and that necessary structural reforms have not been carried out.

Slow And Steady

On the other hand, many analysts say markets' fear of a Fed rate hike has been overdone. Although the bank's tightening plans will have an impact on bond and share markets, the bank is likely to lift rates gradually so as to cause the least damage possible.

Also, the rate increases are a sign of an improving economy, a good sign for U.S. markets.