The one eyed Fed is king

The Fed can feel vindicated; markets have positively digested the first rate hike in nearly a decade, marking the start of ‘policy normalisation’. A return to the long-run equilibrium rate will be gradual, that creates more than enough visibility for short-sighted markets. But there are cracks. Yellen continues to attach a great deal of weight to a tight labour market delivering an inflationary impulse. Similarly, the Fed are underestimating the impact of a strong dollar. And risks from emerging markets (EMs) seemed almost peripheral. The risks from a Chinese renminbi devaluation are a particular danger. But those are concerns for later next year. For the moment ‘lift-off’ means a continuation of dollar strength and we maintain our long positions.

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