Tuesday, September 20, 2016

My Fed Guess

I don't normally like going out on a limb like this, but I'm feeling adventurous today.  Here is my prognosis for how everything will react depending on what the Fed will do.

The Fed Raises Rates

If the Fed raises rates I can see the equity market actually getting a bid. With a rate hike traders will have confirmation finally, and they'd probably get clarity about expectations for another one.  It may drop for a day or two, but I think after that the buyers will return. The initial reaction is always any body's guess, but after a few days or a couple weeks I think the trend will be clear that up is the way out.  Unless we see a bigger rate hike than expected, such as 50bps, then I think this will be how it plays out.

As for bonds I'd expect a sell off near term as pricing is adjusted for higher rates. Remember as rates rise older lower yielding bonds become less desirable.  For the USD this would send it higher against most major currencies.

The Fed Keeps Rates Steady

If the Fed keeps rates steady I actually could see equity markets getting sold off.  Why? More Uncertainty. With no rate hike I think that makes traders uneasy about the economy still not being strong enough, and worries about the Fed adjusting it's path for fear of looking political. Traders and investors like certainty, and with a rate hike still up in the air that creates uncertainty.

Bonds on average would get a bid in response as lower rates for longer mean it's safe to stay in the water.  The USD would be opposite here and a sell off would ensue short term.

So there it is. That's my idea of how things will unfold this week depending on what's decided.  It will be interesting to see what happens to say the least, and to see how my expectations unfold versus what the rest of the world thinks.

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