It’s (still) all about the Fed. Weak Chinese data, the refugee crisis in Europe, and the effect of Iranian oil on the already saturated energy market might be interesting topics, but no one cares. Well, they might care, but only inasmuch as these situations affect the Fed rate decision on Thursday. No matter what happens, there will be much gnashing of teeth and tearing of cloth… and probably a lot of volatility in the markets.
If the Fed bumps the overnight rate from its current range of 0.00% to 0.25% up to a solid 0.25%, then institutions using short-term leverage will have to pay a bit more for funds, and investors will earn a tad more in their money market and savings accounts. These small adjustments won’t tank the economy. We’re talking about raising the cost of borrowing by a mere quarter of a percent, after all. The psychological effect on the stock market, however, could be damaging.
Investors might see a bump in rates as the first of several, and therefore build in expectations of higher rates in the months and years to come. This would boost the U.S. dollar since people expect more yield here than in other economies. At the same time it would ding U.S. equities because a stronger dollar slows exports. My view is that even if the Fed raises rates on Thursday, the next hike would be well into 2016.
If the Fed leaves rates the same, then the U.S. dollar should sell off a bit. Equities might bounce, but the rate decision would be an acknowledgment of financial weakness around the world and possibly an admission that growth here at home is muted at best.
Either way, investors and analysts will have a lot to grumble about.
The interesting part to me is that the financial world seems intent on finding fault in either decision. That’s probably because we’re all on pins and needles about the state of the financial world. China, the Pacific Rim, emerging markets, developed nations – no matter where you look, there’s trouble ahead.
The latest market trends reflect this reality.
Michael Canet is a Registered Representative with TCM Securities, Inc. and can offer securities through TCM Securities, Inc., Member FINRA/SIPC.