They are calling it the most important meeting of the US Federal Reserve in years. The outcome could shake the world, and the FTSE 100 is right in the firing line.
On Thursday, the Fed will decide whether to hike interest rates for the first time since 2006, by the Earth-shattering sum of 0.25%. It doesnt amount to much, but if rates do rise, the impact will be disproportionate. Markets will see this as a signal that the rate cycle is turning. Analysts will instantly start speculating about the next rate hike.The days of record low interest rates will be numbered. We will be in a new world.
Risky assets will be hit hard, as will emerging markets. Their dollar-denominated debts will bemore costlyto service as markets price in addedrisk. Defaults cant be ruled out. FTSE 100 companies generate three quarters of their earnings overseas, particularly in the oil and mining sectors, and will get sweptup in the panic.
Given the dangers, markets are expecting the Fedto stick where it is on Thursday. The probabilityhas been reduced to just 28%. Itll happen in December instead, they say.The global economy is slowing. Equity and bond markets are already volatile. Inflation is negligible. The dollar is strong and a rate hike will only make it stronger. The World Bank and IMF are both warning of the dangers. This is a mighty gamble.
Time To Twist
There are equally good reasons for the Fed to twist. US unemployment is at a lowly 5.1%. Quarterly GDP growth wasupgraded to 3.7% to the end of August. US retail sales for August were weaker than expected, but still firm. Inflation hasbottomed out and could quicklyclimbifthe oil price recovers: the Fed needs to act ahead of the curve. There are strong arguments both ways.
Personally, I hope the Fed twists rather than sticks and puts astop to this will they, wont they nonsense. Yes, it will hurt. Just as the 2013 taper tantrum hurt. And the Chinese devaluation. But markets survived bothof those, and they will survive higher rates as well. A rate hikewill hurt, but it will also hurt in December.
Ironically, theFed will also spook markets if it takes a dovish line on Thursday, by suggesting things are worse than we think. Stick, twist or bust, marketsare heading fora turbulent few days. Fortunately, private investors dont have such acomplicated a decision to make, no matterhow the cards fall. If you are investing for the long-term, stock market volatility is your friend. You can turn any dip to your advantage by seizingthe opportunity to load up on your favourite stocks or tracker funds at reduced prices.
Then all you have to do is hold them for the long term, re-invest your dividends for growth, and wait for stock markets to work their long-term magic. Whether the Fed sticks or twists tomorrow, long-term investors whostick to these Foolish principles have no reason to fear going bust.
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