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Are we there yet?

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As I write this on a damp autumnal morning, summer seems a distant memory. For many of you summer will have memories of young children enquiring from the back seat, ‘are we there yet?’

As I write this on a damp autumnal morning, summer seems a distant memory. For many of you summer will have memories of young children enquiring from the back seat, ‘are we there yet?’
That could be the question that market participants have been asking the U.S. Federal Reserve (Fed) and the Bank of England (BofE).  The parental answer might be, ‘nearly there, won’t be long.’
This blog could easily have been titled ‘Still Fed Up’ following our blog of August 24th bemoaning the markets’ and media’s preoccupation with which month the Fed would raise its short term interest rate.
As we suspected, the Fed chose not to raise rates last week but in its desire to provide forward guidance, the Fed runs the risk of diluting its hard won credibility by shifting the focus away from where rates should be to a micro analysis based on which month rates will rise.  One can only hope that the BofE doesn’t go the same way as an extension of their forward guidance.
In short, what we mean is this: the question should be, is a zero interest rate policy (ZIRP) still warranted in the US?  Not, which month will the Fed Funds rate be increased?  If the focus remains on the latter of those two questions then it will be hard for the US markets and economy to wean itself off what is now an over-aggressive monetary policy.
While the US economy has disappointed in terms of economic output after the first quarter of this year and may be entering a relatively soft patch, housing and employment are strong.  Indeed the housing market’s future robustness may be influenced by mortgage rates which in the US tend to be fixed rate and long dated.  If the Fed is deemed to be less credible as it waits and waits to normalise short rates, the yield curve may steepen and longer rates rise and with it mortgage rates.
Fears of a market tantrum after a rate rise and the international implications for ’emerging markets’ are not a reason to prevent Fed Funds rate normalisation.  Brazil is in a hole because of its own policies and an over reliance on commodity prices being higher than they are while most of Asia has now priced in a US rate hike even if the futures market has pushed it back to the end of 2015.
As we have said before, whether interest rates are 0.25% or 0.50% is less important than liquidity being readily available to those that want credit to sustain their businesses.
We are nearly there and it wouldn’t be the end of the world if we got there a bit quicker.

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