That coming Fed hike? Take it easy

FOR much of this year, the big debate (or obsession) for investors has been about when the US Federal Reserve would start raising interest rates after keeping them near zero for almost seven years. After delays in June and September, attention is now focused on the Dec 15-16 meeting following the Fed's indication at its October meeting that it would consider a hike then and much- stronger-than-expected jobs data for October. US money markets are pricing in a 66 per cent chance of a move in December.

The Fed's inclination to start hiking is understandable. The extraordinary monetary easing since the global financial crisis (zero interest rates and three rounds of quantitative easing, or QE) have done their job in restoring US growth. Jobs are well up on 2008 levels, unemployment is down to 5 per cent, confidence is up, the housing sector has recovered, and business is investing again. And since inflation normally turns up only with a lag, the Fed feels there is an argument to get going.

However, heightened expectations of a hike in December have seen a return to the sort of worries that drove share markets lower in August/September with investors fearful that a Fed hike would put upwards pressure on the US$, which in turn would drive commodity prices lower, accentuate the risk of problems in the emerging world, and adversely affect US economic growth. As a result, shares, commodity prices and emerging-market (EM) currencies have seen some renewed volatility or outright falls so far this month.