Plenty of remarks about the place on the Federal Reserve and the upcoming rate hike.
The spectrum covers, "Yes, they will and its happening as we speak" to "No, they won't. Never".
There are a few facts to be aware of:
1. When the Fed started to talk about a rate hike, that was the beginning of the process. Even talking about it starts to tighten financial conditions.
2. The gains in the USD (which have stabilized in past months) were a tightening of US financial conditions.
3. The falls in the US stock market are a tightening in US financial conditions.
Yep ... its already underway and has been for a while.
Make no mistake, the Federal Reserve WANTS to tighten. Rates have been around zero for too long, they think, and the risks to financial stability are building.
Yellen and Co. are all fully up to speed on those three points above. They are leading the markets. The official 'lift off' hike will just be the icing on the tightening cake (and, cake lovers, there will be more to come. Mixed metaphor lovers, plenty for you too ....)
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Further to point 3 ... Some explanation (via a Goldman Sachs client note)
A review of the economic literature on the monetary policy reaction to stock market changes suggests that a 10% decline in equity prices lowers the fed funds rate by 15bps at the next meeting compared with what it would otherwise be
... lines of research suggest that if the reaction function that prevailed over the last few decades still holds, a 10% decline in stock prices should result in a fed funds rate about 15bps lower after the next meeting than it would otherwise be
In plain English ...
- With the declines in stock prices we should expect a decline in the official Fed Funds interest rate.
- Which we will not get
- Ergo ... effectively this is another tightening in rates
