Last week was laced with Federal Reserve comments that were hawkish and economic data that would lead one to believe that a rate hike should not be eminent. Oh, and by the way North Korea decided to test another bomb… Is this the beginning of the end?

No suspense, the answer is no! Just… no. Sorry, sometimes my sarcasm gets the better of me. There was definitely reason for alarm last week, hence the sell off on Friday to the tune of 2.1% on the S&P 500.

The Federal Reserve Board FRB is good about sending out the governors leading up to the meeting in an attempt at being transparent. However, this week their rhetoric would lead you to believe that a rate increase in September is a real possibility. Markets are pricing in little chance of a hike this month. It is hard to imagine a scenario in our current economic landscape with PMI data falling into contractionary territory, but the FRB tells us that the economy is running hot enough to withstand a rate increase. Productivity, manufacturing, GDP, and services all point to moderating growth. These are opposite of the conditions expected in a rising rate environment.

So, if growth does not warrant a rate hike, why would the FRB be so adamant about doing so? While, we would all love to stay in this loose monetary environment, the FRB knows that when the time comes to fight a big “R” that they have very few tools in their tool kit. It is very clear from what is happening in Europe and Japan that negative rates (at least for developed economies) are very ineffective at spurring on lending.

The FRB’s intentions are exactly where they should be. The problem is that the economy is likely not in a position to respond favorably to a rate increase. This would continue to enforce the muddle along economy that we currently are in. Or worse, it could tip the scales of a weak economy back into… The big “R”! Sorry, my sarcasm again… Not likely, but it does likely prevent our economy from picking up any meaningful steam in the near term.

Why is this not the beginning of the end? The test was an isolated event. Markets will bounce back from that shock. In addition, it is important to remember that August is a low volume month. Volatility is likely to increase as volume increase in September.

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