What's all the worry about?
05 November, 2015
We all know that stories of doom and gloom sell newspapers. But at the risk of registering my lowest readership on record, I'm going to swim against the tide and suggest that if all we have to worry about is whether the U.S. Federal Reserve (Fed) is going to raise its cash rate by 0.25%, then things really can't be all that bad.
Admittedly, it has been a while since the Fed embarked on a hiking cycle. Truth be told, the last time they did, the smartphone was still years from being invented, John Paul II was the Pope, and England held the Rugby World Cup!
This new cycle should not be frightening. In fact, history tells us that financial markets are adept at taking these events in their stride. In the year following the start of four of the last five Fed hiking cycles, every major global asset class registered strongly positive returns. The only exception was in 1994 when an over-eager Fed caught investors off guard with a premature move — something the Fed's new forward guidance specifically aims to avoid.
One small step back towards normality should be seen as a leap in the right direction. The Fed's decision to keep lending rates at near zero in the aftermath of the financial crisis did its job — it helped save the U.S. economy from collapse. But that economy is now growing at a respectable 2.2% and there is simply no longer a need for this emergency interest rate policy.
Those in favour of postponing a hike argue it is too risky to forge ahead while the U.S. economy is still finding its feet and that recent emerging market turmoil has offered us a glimpse into the future should higher U.S. borrowing costs become a reality. But the truth is there is no such thing as the perfect time for the Fed to act and setting policy for someone else's economy has never proved to be a wise decision.
Embrace the now immortal words of All Blacks coach Steve Hansen — worry is a wasted emotion.