Tags: federal reserve | investors | rate hike | economy

One Thing the Fed Did Do – Guarantee Uncertainty Will Haunt Investors

One Thing the Fed Did Do – Guarantee Uncertainty Will Haunt Investors

Friday, 18 September 2015 08:11 AM Current | Bio | Archive

Federal Reserve officials didn’t raise rates.

However, they did do something else.

They guaranteed that the uncertainty about future rate moves will continue to linger.

Fed Chair Janet Yellen gave us a real "first" in her news conference when she expressed her concerns about growth out side the U.S.

"The outlook abroad appears to have become more uncertain of late, and heightened concerns about growth in China and other emerging market economies have led to notable volatility in financial markets," she said.

However, she also later said "our decision will not hinge on any particular data release or on day-to-day movements" in financial markets.

"Developments since our July meeting, including the drop in equity prices, the further appreciation of the dollar, and a widening in risk spreads, have tightened overall financial conditions to some extent," she said.

"Given the significant economic and financial interconnections between the United States and the rest of the world, the situation abroad bears close watching.”

Japanese Finance Minister Taro Aso said the Fed leaving its rates unchanged probably reflected lobbying at the recent G-20 meeting in Turkey by emerging economies that U.S. rate hikes would damage their economies

So why didn't the Fed raise rates?

For reasons, look to the serious warnings the World Bank gave in its report “The Coming U.S. Interest Rate Tighten Cycle: Smooth Sailing or Stormy Waters?”

“The U.S. economy and labor markets have further strengthened. Activity in other advanced economies is firming, although it remains fragile," the report stated. "While emerging and frontier market economies may hope for the best during the upcoming tightening cycle, given the substantial risks involved, they need to prepare for the worst.”

Regardless, Yellen’s reasons for holding rates weren't convincing.

Meanwhile, the U.S. recovery cycle is “aging” when we take into account “cycles” historically live on average 7 years.

And why has the FOMC continuously lowered its interest rates predictions?

The Fed shouldn't wait for other global economies to improve before raising U.S. rates. Such global improvement will take years, not months.

China has been declining since 2010 and emerging economies have taken too much cheap debt in U.S. dollars to only sink it in failed investments.

Nobody contests the U.S. is a big part of global trade, but we shouldn't overexagerate World Bank facts.

The Fed based its decision to hold US rates more on global factor instead of domestic considerations.

That decision sparked volatility as seen in the volatility in the VIX "fear index."

So, one thing is assured: Uncertainty will remain with us for quite some time to come, which is a negative for long-term investing.

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One thing is for sure, uncertainty will remain with us for quite some time to come, which is a negative for long-term investing.
federal reserve, investors, rate hike, economy
Friday, 18 September 2015 08:11 AM
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