Enjoy NOT Living in the Basement Anymore

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The Fed funds target rate and Treasury yields remain historically low, even though the Fed increased the target rate in December 2016.

The Fed is widely expected to raise interest rates today and that hike is already priced into the market. It is unequivocally good news when the U.S. Fed Funds rate can be lifted to 2% after being stuck in the .25% basement from 2008 to 2015 due to a lackluster recovery. Investors will be looking for clues as to future Fed actions. Sure, the economic data is coming in strong. In fact, the U.S. is now considered the developed country leader in the still very much intact global synchronized expansion after some first quarter softness in Europe and Japan. That strength has manifested itself in the U.S. dollar and as a result, some emerging markets have been struggling. Emerging economies frequently have dollar denominated debt, which becomes more burdensome when the dollar strengthens. In addition higher rates in the U.S. constrain global liquidity and spur an outflow of funds from emerging markets and back to the U.S. Brazil is 7% of the MSCI EM index and recently experienced an 8% drop in their markets. But their problems are also domestic, as 2018 GDP forecasts are being cut and political turmoil is failing to provide positive economic direction. Fed action and a stronger dollar can only take partial responsibility for the EM turmoil if just uncovering weakness that was already there. There is still plenty of opportunity in EM as the global economy expands. Moreover, emerging markets typically offer more compelling p/e ratios in equities and higher bond yields than those available in developed nations. And remember a relatively weak currency makes trade more attractive and boosts the local economy. Please follow the Fed on on page 34 of the Global Perspectives Book.

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