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As we slowly but surely head into the month of September and October (2015) the chorus for a US interest rate rise is getting louder.The US federal reserve has been prompting this increase since the onset of Janet Yellen’s term as Federal reserve chairperson. The Federal Reserve’s rate hike tone has mainly been through it’s “dual nature forward guidance”, which leaves room for further taper of quantitative easing or/and potential of an increase in interest rates. In my view, the Fed’s forward guidance is not telling a story; causing market participants to anticipate and develop a bias (a rate increase).

However, lets pause and have a straight forward look and question if a rate hike is supported by underlying fundamentals.

Let’s talk US inflation rates. Since the beginning of 2015 , US economy has been nearing a deflationary territory. An increase in interest rates at this stage is an unwanted tightening of monetary policy. Resultant of such an action will put further pressure on consumer spending and potential long term increasing defaults in consumer and business loans.

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Combining the above with tapering of quantitative easing- that has provided artificial support to the markets…we have a deadly concoction of confused policy makers and actual economic data.

For now, I am not totally buying into the concept of an increase in interest rates in September or October since the re-precautions can be enormous in a deflationary environment. In short, we need some real good data in consecutive months to entertain the thought of a rate hike.

30-Day Fed Funds futures prices- Implied Probability for September 2015 rate hike.Source:CME Group

30-Day Fed Funds futures prices- Implied Probability for September 2015 rate hike.Source:CME Group

30-Day Fed Funds futures prices- Implied Probability for October 2015 rate hike.Source:CME Group

30-Day Fed Funds futures prices- Implied Probability for October 2015 rate hike.Source:CME Group

All said and done, following 2008 the Fed introduced quantitative easing…who is to say the Fed will not pull another rabbit out of it’s hat. Also, lets not forget the ripple effect of an increase in US interest rates on Greece and consequently the Euro zone.

The US Fed rate hike outcome is more that a pure resultant of globalization in economies but a globalization of politics in the making.

Irrespective of how the US interest rates play out; I am taking an approach of being adaptive rather than right or wrong as we head into the rest of the year.

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