We all know the US Federal Reserve is the most powerful central bank in the world, by a country mile. Most of us will have heard the phrase Never fight the Fed, because there can only be one winner. Chairman Janet Yellen canmove marketssimply by clearingher throat. Members of the rate setting Federal Open Market Committee wieldsimilar superpowers. Markets hang on their every grunt, nudge and wink. But right now, the amountof attention theyre getting is bordering on ridiculous.
Game on
Throughout 2016, market analysts haveplayed an increasingly tiresome game of will they, wont they?. Raise rates, that is. The Fed hiked them by just 0.25% in December, and although there were other reasons for Januarys instant market rout, those meagre25 basis points played a key part. For many, this confirmed suspicionsthat markets simply arentin a position to withstand higher borrowing costs.
Analysts started 2016 predictinganother four base rate hikes from the Fed, but so far weve seen none. I was always surprised by those bullish forecasts, given the fragile state of the global economy,but even I would have
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expected at least one measly US interest rate hike thusfar.
Hawks v Doves redux
We may still get it this month. The next FOMC meeting is on 20/21 September, and thebuild-up has triggeredincreasingly fevered speculation the Fed will bite the bullet this time. Accordingly, every time Fed hawks flashes theirclaws, markets plunge. So when vice-chairman Stanley Fischer said at Jackson Hole in August thathe still saw the possibility of two rate hikes this year, down stocks went.Last Friday was shaping up to be a dull trading day, until FMOC memberEric Rosengren opened his mouth to warn that theFed risks creating more problems in waiting to raise rates, when markets plunged again.
Every timea dove flies out of the traps, markets move just as quickly. So when Fed governor Lael Brained suggestedtheres nohurry and low rates are the new normal, up stocks surged.
Ready, Feddy
September is always a nervous time for investors but now it seems we only need to worry about one thing. Forget Brexit. Ignore Eurozone or Japanese easing. Chinese GDP data who cares? All that matters is who emerges victorious in the face-offbetween the hawks and the doves. Data matters (such asnon-farm payrolls, inflation, business investment and house prices) but only in the context of how it will affect Fed thinking. Thats how dependent markets have become on easy money.
For what its worth, I dont expect a rate hike in September. If Im wrong, markets will have a bad month of it. If Im right, theyll have a good month. The Fed decides all. Traders will be hanging on every Fed utterance but long-term investors dont need to pay such close attention. If youre investing for five, 10, 15 years or longer you can afford to ignore short-term market movements. Mercifully, you can even ignore the Fed.
Investors need to focus less on the Fed and more on their own actions. One small mistake in uncertain times like these can cost you dear.
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