For Fed, If Not Now, When?
“All things entail rising and falling timing. You must be able to discern this.” - Miyamoto Musashi
As the media continues to debate with prognosticators about what the Fed is going to do at this week’s meeting (and more importantly what the Fed will say), there remains a distinct possibility that the discussion will shift to a Fed that is too late to raising rates more aggressively.
But the economic data looks bad right? How can the Fed raise rates when global growth risks remain elevated? First, consider that one of the reasons the Fed held off on raising rates is the excuse that emerging market turmoil would ensure. Emerging markets (EEM), however, are among the best performing parts of the investable landscape year to date. Commodities (DBC) have staged a massive rebound, pushing inflation expectations higher.
More so than that? Credit spreads have completely cratered. Five-year yield spreads for AAA and BBB rated bond yields are sitting right at their median, after an incredible comeback in the last several months.
Click here for chart.
Think it through. The market has calmed down so aggressively in terms of credit risk that not only does it seem that the yield curve will steepen as a result, but also that risk-on conditions can persist in the near-term. Our Beta Rotation Index which is built on our award winning research (click here to download) is fully exposed to beta here given quantitative metrics which confirm that, for the time being, all is calm.
If there’s ever an environment to raise rates, it is precisely when you are in such a credit market state. Of course, we all know the Fed tends to err on the dovish side, which for equity bulls is a good thing. Short-term though, if the Fed does not begin to more aggressively raise rates, there is a longer-term risk that they simply won’t be able to have ammunition when credit spreads inevitabley rise again.
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