Communication is key
Chris Barris, global head of high yield at Alcentra, is more bullish, however. While he agrees that it is unlikely that tomorrow’s hike, should it come, will be a solitary incident, he believes the Fed will remain not only prudent and cautious, but also pragmatic over the next year.
“I think the Fed has capacity for three rate hikes between now and the end of next year with the Fed funds rate rising by 75 basis points from current levels by the end of 2016. The US will experience modest economic growth, slightly above 2% and consumer spending will drive much of that growth.”
For Sinead Colton, head of investment strategy at Mellon Capital, the explanation of its actions will be more important than the decision itself.
“The way in which the Fed explains its actions as it pursues normalisation will also influence how markets react to the now unfamiliar experience of higher rate, given this will be the first Fed rate hike in many years. We don’t view policy normalisation as being too disruptive to markets as long as the Fed communicates clearly that, as expected, they plan to tighten policy at a very measured pace.”
How tomorrow’s decision is remembered in future will depend a lot on both how it is framed and how it is received. If it does indeed move and that move engenders further confidence at a corporate and a consumer level in the recovery, then growth could well continue, but it remains a big if, especially given the strength of the dollar.
In the parlance of Rocky Balboa, it is not about how hard the Fed can hit, it is about how hard the US can get hit!
