Practical analysis for investment professionals
14 December 2015

Turning Points: Will the Fed Upset the Apple Cart?

Posted In: Weekend Reads

The Federal Reserve

The US Federal Reserve’s next meeting of the Federal Open Market Committee will be on 15–16 December. Many expect Fed chair Janet Yellen to begin the process of reversing the extraordinary monetary measures adopted after the crisis by raising interest rates. If so, this should further strengthen the dollar and weaken other major currencies which are either standing pat (e.g., the Japanese yen) or escalating monetary accommodation (e.g., the euro). The prospect of tightening is already showing some fissures in the market. Junk bond spreads are soaring, and the US 10-year swap spread has recently turned negative, suggesting, among other things, that companies might be looking to ramp up debt before rates rise. Despite these marked changes, the US equity market has yawned through it.

Emerging market demand continues to weaken, and a stronger US dollar will exacerbate that. China continues showing weakness in demand for iron ore, copper, and oil. Moreover, China’s housing worries suggest that no quick fix is possible. At a broader level, the prospect of rising rates could bring so-called bubbles into focus. Clearly the Fed has been cautious not to upset the precarious balance of markets and policy. Let’s see if they can achieve their policy aims without upsetting the apple cart.

Here’s a wrap-up of key issues affecting global markets for fundamental investors.



China’s Direction

Credit Markets



Euro Crisis

Hedge Fund Money

Interest Rates and Central Banks

Japanese Debt and Inflation

Stock Market

Follow the Bubble

Time Capsule

In light of the prospect that the Fed may raises rates, I thought it might be instructive to go back and reconsider the 1937–1938 period when the United States slipped back into recession without having fully recovered from the Great Depression. Of course, our interpretations are always colored by our beliefs and perceptions, so I will present two papers that interpret that recession quite differently. In the first, Christina Romer describes a narrative that tight monetary policy, including a sharp increase in the reserve requirement ratio at banks, forced the United States back into recession. In the second, Jonathan Finegold describes how an influx of gold from Europe, escalating inflation, waning productivity, and heavy government regulation led to recession.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Ron Rimkus, CFA

Ron Rimkus, CFA, was Director of Economics & Alternative Assets at CFA Institute, where he wrote about economics, monetary policy, currencies, global macro, behavioral finance, fixed income and alternative investments, such as gold and bitcoin (among other things). Previously, he served as SVP and Director of Large-cap Equity Products for BB&T Asset Management, where he led a team of research analysts, 300 regional portfolio managers, client service specialists, and marketing staff. He also served as a Senior Vice President and Lead Portfolio Manager of large-cap equity products at Mesirow Financial. Rimkus earned a BA degree in economics from Brown University and his MBA from the Anderson School of Management at UCLA. Topical Expertise: Alternative Investments · Economics

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