Asia Unhedged is making a bet: the Fed will raise rates on Sept. 17 — straight into the face of a global deflationary spiral.
We hope we’re wrong. But the tea leaves aren’t lining up that way. An actual Fed hike is likely to create a worse mess than incessant Fed official gabbling about a hike has already produced. The probable move is more than reminiscent of some not-so-distant Bank of Japan actions. (See chart) And like the BOJ we wonder when the Fed will be forced to eat crow and reverse itself?
That type of about-face is the most likely outcome when the policy decision is announced at the conclusion of the Sept. 16-17 FOMC meeting.
Of course, nothing is a done deal until it’s actually done. Fed funds futures only assign a 30% probability to a 25bps rate hike on Sept 17. But in this case, traders probably have it wrong, precisely because they’re being too rational in what the Fed will do and aren’t taking into account the Fed’s monetary theology.
QE was done and went through several incarnations on the hope of creating a sustainable recovery. After seven years, you either have to admit that the whole thing didn’t exactly work out as planned or declare victory and walk away from the mess. The former is not an option; so it’s the latter … and to heck with IMF, World Bank and numerous others’ cautions. Brazil, Turkey and numerous other developing economies with negative current accounts and substantial US dollar debt will be on the miserable receiving end of the expected Fed action, but US rates traders may also be hit hard if they don’t take last-minute precautions. Expect more volatility, buy that if you can, and otherwise stay away from the fray. Regarding equities, it’s definitely too early to buy dips.