Tomorrow we will get the Federal Reserve’s decision on whether or not they will raise the Fed Funds rate. The market has been stewing over a rate rise for what seems like an eternity. I think they will move and the market seems to agree, with the Fed Funds futures pricing in a 72 per cent probability as of this writing.

But should they? The Fed has what is called a dual mandate: inflation and unemployment. Essentially they are tasked with promoting effectively the goals of maximum employment, stable prices and moderate long-term interest rates. So with this in mind let’s assess both.

Unemployment

Unemployment is undeniably falling in the US. It’s also true that no one really knows what “full employment” looks like or what that rate really is to suggest we are there. There is, of course, the worry that if the unemployment rate falls the risk of an inflationary trend could develop with a tightening labour market, and the subsequent wage price escalation that follows. With the headline unemployment number now down to 5 per cent we are likely getting closer to some traction in wages. But the broader measure of employment, as measured by U6 would suggest we are only back to levels seen in the last recession and nowhere near fully recovered levels.

Inflation

Lower global demand has had a dampening effect on consumer and producer prices and absent a supply shock, inflation rates will likely remain subdued for years to come. This is especially problematic for the high and rising global debt burden. Without any pick-up in growth and higher inflation readings, government debt-to-GDP ratios will not improve. The more money that has to be allocated to debt servicing, the less that is available for consumption. The Dallas Fed Trimmed Mean Personal Consumption Inflation Rate (yes that is a mouthful) does not indicate any inflationary pressures at this stage and remains below the Fed’s target of about 2 per cent.

We do not, at this stage, see any concern for inflation but acknowledge that it does tend to sneak up on people. However, the commodities market would actually suggest a deflationary scare is more likely at this stage rather than rising inflation. Commodity prices are simply melting away and are hitting levels not seen since the Great Financial Crisis!

Unfortunately, the focus, which is, in my opinion, unwarranted, is still on the Fed. A quarter-point rise in the Fed Funds rate will not stop new drugs being invented, new software being developed, or innovation. It will in fact help banks and those running money market funds. At the end of the day, other factors outside of the Fed’s actions will have a greater influence on markets and individual investments. Maybe we should fret less about the Fed’s actions and more about the global macro situation?

Regardless of your views as to whether the Fed is justified or not in raising, they most likely will. The real debate going forward is the trajectory of rate increases. This will determine path of rates and ultimately help to influence fixed-income returns in the future.

Nathan Kowalski CPA, CA, CFA, CIM is the Chief Financial Officer of Anchor Investment Management Ltd. and can be reached at nkowalski@anchor.bm

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