The Fed does not appear to ever have raised interest rates with the ISM manufacturing number below 50.  It appears as though almost zero interest rates and service sector strength may have proved to be the compensating factors that lead them to end this streak.

Was the rate hike the right thing to do on December 16th?  Following over 5 years of a Fed Funds rate of close to zero such a move is probably long overdue.  The global economy seems to be entering an anemic period, one that may not reverse itself in the near term due to aging demographics in the developed world.  As a result there may not be too many more appealing junctures on the horizon to raise rates.

Such a move is unlikely to curtail a strong dollar and may continue to hinder manufacturing, particularly as it relates to exports.  That said, offering almost free money for seemingly indefinite stretches typically encourages excessive risk taking and increased probability of future bubbles.  The economy is not strong, but likely solid enough to justify a move.

Will China’s early 2016 devaluation cause the Fed to second guess their rate rise?  Surely at a minimum it provides pause with respect to the proposed multiple rate hikes in 2016?  On the other hand at least it gives them the option to lower rates, should the global equity market rout of early 2016 persist.


Hafeez Esmail is the Chief Compliance Officer at Main Management, a participant in the ETF Strategist Channel.


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