Last Minute Thoughts On The Fed

The much awaited FOMC meeting is here. Discussions appear to revolve around to main questions. What should the Fed do and what will the it do? And the two are often confused.  

Everyone has an opinion about the former. It is like watching a sporting event. We do not let our lack of experience prevent us from being critical of players or coaches and offering unsolicited advice (even if through a TV) on how to win. What should the coach do?   

The betting person spends little time on “oughts,” and considers what is the most likely outcome. They will evaluate various factors and place their wager accordingly. Investors must do the same thing.  

What the Fed ought to do can be debated ad nauseum.  There are as many opinions as people.  It is of little bearing on investment outcomes.   The market will respond to what the Fed does. The response is shaped the a combination of expectations and positioning. Admittedly, it is in the expectations component that the confusion between what the Fed ought and will do is most pronounced.  

We have been anticipating a rate hike today for more than six months. The guidance from the Fed’s leadership, and evolving economic data led us to that conclusion. We recognize that the economic uncertainty has risen, and financial conditions have deteriorated, by some measures, over the past four to six weeks.  

Developments in China seem to be at the center of the concern. On one hand, the pace of Chinese growth has become more suspect, and the knock-on effects may be more serious than recognized when one confines the inquiry to the bilateral Sino-American ties. Many other US trading partners may also be adversely impacted. China accounts for around a third of global capex. Its demand for raw materials is among the key drivers of numerous commodity prices.  

The Federal Reserve has three mandates:  full employment, price stability, and financial market stability. In effect, the idea is that even if the first is well on the way to being met, and from the Fed’s view that is the key to the second goal, events in China, may have jeopardized the third, financial stability.