Fed rate rise looking increasingly likely next month
It is looking more and more likely that the U.S. Federal Reserve will raise interest rates in December for the first time in nine years.
As I’ve mentioned in previous blogs, the probability of a rate rise in 2015 has been at the heart of rumour and speculation over the last 12 months. However, with stronger than anticipated employment data in the U.S. last month – a quarter of a million jobs were added in October– expectation of a hike in December is rife.
Particularly as Fed chairman, Janet Yellen describes the proposed rise as a ‘live possibility’.
Consequently, looking at the current economic situation, holding rates at near-zero is becoming increasingly unwarrantable. Also, a 0.25 per cent rise now is preferable to a higher and quicker increase down the line.
In my view, the Fed needs to act sooner rather than later. Should the rate hike be delayed further, the Fed will be backed into a corner resulting in a loosening cycle with little or no ammunition to take action. Naturally, Janet Yellen will be aware of this, and will be pushing for the hike following the recoil in September.
In view of this anticipated rate rise, I would urge investors globally to ensure they are ‘Fed-ready’ ahead of the December announcement.
This is due to the fact that even though it’s impossible to predict the market reaction following the first hike in nearly a decade, the Fed’s caution over such a long period of time is evidence of its confidence in the resilience of the underlying U.S. and global economies.
Therefore, should the investment community agree with this, which is probable, corporate earnings growth will be supported. They should then prepare to make the most of the inevitable benefits as a direct result of the Fed’s policy tightening.
Savvy investors should consider allocating cash to invest in stock markets, as even though it is unlikely we’ll see remarkable returns, steady growth is to be expected.
However until the Fed announces its decision, accurate predictions cannot be made as to how each asset class will react to the rate increase. As such, being ‘Fed-ready’ should also include proper diversification across industrial sectors, asset classes and geographical regions to best take advantage of the prospective opportunities.