Will they? Won't they? Does it matter?

With all the commentator angst and market volatility we have seen over the last few months, you could be excused for assuming that the FOMC decision (NZ time Friday morning 6AM).  Of those that have a strong opinion, there are essentially two camps.  

  1. The FED must tighten - normalising monetary policy is long overdue and already there are signs of capacity constraints in the Labour market that will surely end in inflation.  
  2. The FED should not tighten - the US and Global economies are fragile, and a hasty rate hike will destroy confidence and lead to the demise of Chinese day traders.

We are actually in camp 3 - it doesn't really matter what will happen this week, but we will get rate hikes soon-ish no matter what.

We are gonna get higher short term rates at some point - Sep, Oct, Dec, Q1 2016.  What is more important than an actual hike is the Fed's opinion on the state of the real economy. And what that means for the USD and for corporate earnings.  While it is quite clear the economy in 2015 hasn't hit lift off speed, most commentators have a positive view of the next year and certainly have a positive view on corporate earnings.

IT is important though to think now (or even 6 months ago) about positioning for life in a policy tightening environment.  With higher US funding rates there are some powerful -- and not necessarily positive - implications for emerging market equities, for global currencies and fixed income markets generally.  But policy tightening in itself, especially when that tightening is primarily because of better growth is not usually a negative for equity markets in the US.  Tightening policy to defend a currency though is a different story, and that almost always ends in a bad experience for equity investors.

Here is the Atlanta Fed's read on Q3 GDP - quite a lot lower than the street forecasts.  If the FOMC sees growth the same way we might get a delay in tightening to see how GDP pans out:

For the record, we would see any weakness on the FOMC decision as a buying opportunity - valuations are not stretched, and definitely more sympathetic than 6 weeks ago.

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