I will rarely write about Fed monetary policy or economics in these morning emails. However, today it is important because I believe there is some market moving information worthy of discussion.
Boston Fed President Rosengren delivered a speech in Beijing, China this morning in which he laid out a pretty strong case for the Fed to resume hiking rates:
"Yet despite the weak growth in the U.S. economy, by historical standards U.S. labor markets are now at, or close to, the rate of unemployment that most economists consider full employment. And, while “core” inflation (using the Personal Consumption Expenditures price index or PCE1 ) remains below the Federal Reserve’s 2 percent target, there have been gradual increases in our core measure of PCE inflation – from readings of 1.3 to 1.4 percent last year to 1.6 percent currently. With the U.S. economy closing in on full employment, and edging closer to the 2 percent inflation target, the Federal Reserve’s dual mandate – stable prices and maximum sustainable employment – is likely to be achieved relatively soon. But, considering the aforementioned 3 challenges in the global economy, important questions confront monetary policymakers in the United States. When and how quickly should the Fed normalize interest rates? And what is the “normal” rate?"
A Fed President can never come out and say "we're going to raise rates next month", instead they have to carefully couch their language and indicate policy through only the most subtle hints. The above excerpt from the speech tells me the Fed is confident in the upward trajectory of inflation and that a rate hike is coming. In fact, the whole speech was focused on the risks of maintaining ZIRP for too long and how policy must remain balanced (dual mandate vs. risks of being too accommodative for too long).
A rate hike is coming and I doubt it will be a positive for almost any asset class in the near term lead up to the Fed decision on September 21st. However, such a move is sure to get priced into markets over the coming weeks which will result in ample trading opportunities from both sides of the market in the aftermath of a Fed rate hike.
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