The party is over

Alright. Be honest. Do you feel more ‘normal’ today? Just a little bit? Or is that fuzzy and queasy feeling you get after a big night on the town? When you know it’s going to be a long day and the hangover hasn’t really set in?

In a move that surprised nobody and pleased even fewer, the US Federal Reserve did what it told everyone it would do. It removed the punch bowl, turned the house lights up, and raised the target short-term US rate to a range between .25 and .50 basis points.

If that last sentence was like chewing marbles, it shows you how indecisive the Fed’s action is. Never has there been a more reluctant and unenthusiastic interest rate rise, at least not that I can recall.

To be fair, there’s a whole generation of traders and investors who have no recollection of an interest rate hike. The last time the Fed did anything like this, Tony Blair lived at Number Ten Downing Street and Taylor Swift was a 16-year old releasing her first album. It was nine years ago.

”We believe we have seen substantial improvement in labour market conditions and while things may be uneven across regions of the country, and different industrial sectors, we see an economy that is on a path of sustainable improvement”, the Fed lied in its statement.

Well, it wasn’t exactly a lie

But people see what they want to see, especially when what they’re looking at is unspeakably ugly. Officially, the US unemployment rate is now 5%. It was 10% in 2009. That seems like “substantial improvement”. But keep in mind the official figure excludes Americans who’ve simply given up looking for work and dropped out of the labour force altogether. When you don’t count those people, there’s going to be a lot fewer of them.

What more can be said about what the Fed did? Not much. The Dow Jones rallied 1.28%. Investors like the idea of ”gradual” rate hikes and a stronger dollar. It suggests that capital may flow into dollar denominated assets in 2016. That’s a nice narrative and a simple trade.

Whether the narrative is just a good story or corresponds to reality is another matter. But in the short term, it probably means a lot more pain for commodities and emerging markets. If you’re a steely-eyed contrarian, you’d have a good hard look at miners right now. That’s what Alex Williams talked about on the show yesterday. He also wrote the cover story for this week’s magazine. It drops on your doorstep tomorrow.

Category: Central Banks