On 16-17 Sep, the Fed will hold the FOMC meeting with a possibility of a rate hike for the first time since the subprime mortgage crisis. The result will be published on the 17th.
Although we have already been writing about the Fed’s rate hike, we would like to summarize our opinions here. We regard the following 2 scenarios as highly likely:
- The Fed will raise the interest rates, also delivering some dovish comments to relieve the markets
- The Fed will not raise the interest rates, but it clearly mentions its plan to raise the rates within the year.
We consider these two possibilities are equally likely. In either case, we expect the Fed to be clear that it is going to raise the rates in the near future.
In case of a rate hike in Sep
If the Fed is going to raise the interest rates this month, they will have to be very careful on the statement. The stock markets have not yet recovered from the turmoil since Aug, and the rate hike could make the fall even more serious.
The first thing that is necessary for the Fed is to be clear that it is not going to rush for the second rate hike. If the Fed is to be more vigilant, it is also possible that it mentions in the statement that after the first rate hike, it will be flexible for both easing and tightening, according to the economic conditions.
In case of no rate hike in Sep
On the other hand, if the Fed is not going to raise the rates this time, it would probably clearly mention that it plans to do so within the year, giving investors time to prepare. This option would be much more flexible and thus more attractive for the Fed.
The only concern about this option is that the FOMC meeting on Oct does not have a press conference. The one in Sep does. Consequently, if it misses Sep, it would miss an opportunity to talk to the markets in Oct, or they could only raise the rates in Dec. Considering all the circumstances, we consider those two scenarios are equally likely.
Within the year, in any case
In either case, we expect a rate hike within the year. Yet, why is the Fed so eager for a rate hike even though the inflation is not yet elevated, and the economy is not too strong? As we explained before, the Fed is not seriously concerned about the economic statistics but merely using it as an excuse to raise the rates. It is concerned about something else.
If it goes dovish
So far, we have not mentioned the possibility of the Fed going dovish, but before the FOMC meeting, we evaluate this possibility as a risk for investors.
If the Fed withdraws its plan for a rate hike, the US stocks will rebound, and the dollar will go down. In this case, however, investors must remember why it has had to become dovish. The reason for it to be dovish is the market instability, and therefore if the market rebounds and becomes stable with the withdrawal of a rate hike, there will no longer be a reason for it to be dovish. Thus, a trend for a rate hike would not change.
If the dollar goes down with the dovish Fed, especially USD/JPY is a buy. To know when to buy USD/JPY and why, see the following articles:
- 2015-2016: Bank of Japan’s monetary base and timeline for QE and its expansion
- 2015-2016: What will happen to USD/JPY when the BoJ expands the QE further?
The financial markets have finally come to the most difficult point, where investors and central bankers have to read each other’s mind. Investors will especially have to watch carefully the relationships between the central banks of developed countries. Investors will have to accept losses if they misread that. We explained further about this in the following article:
Compared to the markets after 2008, where it was easy to make money just if you follow the central banks, the markets after 2015 are extremely difficult. However, after enduring the less profitable markets, if you manage to catch the moment of the collapse of the QE bubble, you will make the greatest profit in the recent years. The time has not come yet, but it is near.