Thursday 17 December 2015

Fed finally has liftoff in one of the most anticipated rate hikes of all time

While waiting for the Fed's announcement yesterday there was a sense of relief if not cohesion amongst most in the financial markets in agreeing that the time had arrived for the end of a historical era for monetary policy in the US by witnessing the first interest rate hike since June 2006 with an unanimous yes vote from all FOMC members yesterday.

Going into the announcement the Fed was weighed down heavily by the approach it took in its tone it set in assuring the market that the economy would be able to absorb a hike of minimal proportion but then at the same time allay fears that any further increases would be conducted with the utmost care with the state of the economy's on top of the agenda making one feel as if the ground below us may not feel as solid as we think.

The market has been tinkering with the thought of a rate hike for some time now which made me believe that it wasn't so much the rate hike that would hinder the market's ability to find certainty but more so the Fed's guidance to how it plans to normalise the interest rate cycle from a very low base, probably the toughest feat to achieve since the Fed embarked on it's gung ho monetary easing stimulus.

The Fed seemingly managed expectations well giving broad indicators of what it thought would be suffice to say whether a goal had met to the understanding of the FOMC but I must admit, did anyone expect it to have stringent measures already in place before they've even started the process? You would be gullible to think that were the case as the intricacies would require more evolution of the economy from this current resting point and a more thought out process.

But the true test of the Fed will be how it manages to navigate through what I think will be persistent yet troubling theme in 2016 namely emerging markets. We've seen the onslaught on commodity markets this year but we yet to see the full effect of these on most of those economies. To make matters worse, the global attraction to a strengthening dollar has resulted in most of the emerging market currencies selling off in a frenzy and investors finding refuge in the hands of safety.

The central bankers of some these economies have pre-empted the Fed's action and began the process of lifting rates in the hope of getting a head start but they've done so risking the well being of their economies.

So far we've seen no constraint when it came to selling these riskier currencies off and now that the Fed has placed an expectation of reaching 1.4% by the end of next year, translating into four rate hikes in the process, the pressure will inevitably begin to build as we start to see failure from these developing economies struggling in a tough cycle bestowed on them from the commodities rout.

This could very well play against the stability the Fed wants to abate which is why they struck such a dovish tone last night knowing the full risk these economies present to them. China is one of the key components in ensuring stability to these developing economies and it will be interesting to see if their own policymakers can get a hold of their own dilemma's.
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