Talking Points:
• While accommodative monetary policy was directed at jobs, inflation and growth; it also bolstered risk taking
• Given the reach for return - and its risk - the Fed's pilot shift in policy may shake out weak speculative hands
• There is deleveraging to be done in the markets, but the start of normalization will also bolster investment
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There are many implications for the Fed approaching 'liftoff'. For the Dollar, a rate hike confers a speculative draw that has already established an impressive trend. For near-term risk trends, the bump in cost for funds will increase the cost for leverage and exposure with tepid yield - which would likely encourage deleveraging from speculative excess. However, not all side effects of the central bank's normalization result in exchange rate or capital market volatility. There are positive implications to the shift. A tightening of the extremely loose policy is a strong statement on confidence in economic activity and financial stability. However, a less sentimental outcome will be the slow rise in market-based returns. Yield, dividends and income have been severely deflated over the past six years. Their recovery will eventually return the markets to a long-term, stable investment environment. We look beyond the short-term debate of the Fed's rate hike in today's Strategy Video.
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