Thoughts on the Fed's announcement

I must admit that the hype we saw around the last FOMC meeting in September isn't prevailing today but there is a degree of edgeness leading up to the announcement. Although many expect the rates to be put on hold and probably till early next year the key in today's decision will again be the words that are used. 

Participates have become so sensitive to the slightest divergence in wording that a single change in a word or two has the effect to move markets in a big way. I think looking back to that meeting, markets were in a much different state than the calmer conditions we see today. 

The Fed cited reasons involving the shakiness in global financial markets stemming from a Chinese economic slowdown to tepid inflation that has diverged away from their long term targets as some of the things that Fed members were most concerned about and in essences held off hiking rates due to a risk of destabilising the system further. 

Now after witnessing the last month of price movement it would seem as if confidence has found its way back into global markets again. Part of the reason is the release of better economic data numbers coming out of China even if there are some that still disbelieve the figures being presented and the government has stepped in a few times to prevent further destruction. 

If you've been around long enough you realise there is always an over exaggeration surrounding news flow which requires us to step back from the chaos that is and look more deeply into the situation and formulate a view. In China's case, authorities have a number of measures it still has on hand to stimulate its economy which does lever a boost in confidence for investors who fear they may not react appropriately. 

I think what's slowly starting to emerge is the risk that the US economy may not be as equipped to handle whatever headwinds may be felt from a hike in interest rates even if it were only 25 bps. Since the Fed completely turned the monetary tap off we've seen markets become more and more skittish at the prospects of a hike making it very uncertain to how they will react. 

If anything, if the Fed were to continuing it's delaying tactics it's opening up the possibilities to introduction of more stimulus measures.This will inevitably lead to an even bigger crises that has been bubbling under surface for some time now. The Fed has used up all it's tools and now faced with a difficult decision to implement tightening measures that would be very unpopular with Main Street because too much attention has been placed on Wall Street.

The fact of the matter is global equity markets are hitting the pinnacle of valuations which can been seen in the record breaking movements happening on most indices but the real question is do they have the goods to back it up or will it just implode?