Antia: Fed Overreaction Creates Investor Opportunity

August 18, 2015

Shehriyar Antia is founder and lead strategist of Macro Insight Group, an investment strategy firm based in New York. Previously, he spent 10 years as a senior market analyst at the Federal Reserve Bank of New York, where he was closely involved in quantitative easing programs, capital markets and monetary policy. Antia is a regular contributor to prominent publications, including Institutional Investor and Barron's.

Also, see our Related ETFs section at the bottom of the interview. How should investors view China's devaluing its currency, the yuan? Should they be rethinking anything? Should they even care?
Shehriyar Antia: It's clear the Chinese economy has been slowing over the last year or so. Growth hasn't been as robust as it has been in the past. But the strong message I get from this move is that Chinese authorities have both the determination and the resources to ensure there's not a hard landing anytime soon.

Chinese authorities have been pulling on multiple levers over the last couple of months—everything from altering regulations in bank reserves and bank lending to the trading environment in the equity space. Now they're pulling on the currency lever.

This highlights for me once again that the Chinese authorities have the determination, the resolve as well as the resources to do whatever they can to ensure a soft landing in China.

As far as some implications may be for the more domestically focused investor, I really don't see that this, as it's currently playing out, is going to influence the Fed in a big way. There's a threshold that would need to be crossed for something abroad to really impact the actions of the Fed.

That threshold is that U.S. financial conditions would need to tighten. Basically that would mean spreads widening for corporates, banks, consumers right here at home. That would be something the Fed would need to pay attention to. And how do you interpret this upcoming September meeting?
Antia: There's a growing expectation that, in September, the Fed will initiate its first rate hike in almost a decade. I believe that's overdone a bit. The key is still inflation, or lack of, which is holding the Fed back. It's not labor markets. So I still think December is most likely.

The Fed members have three biases. One is that they want to move interest rates in 2015, this year. Two is that they want to move on the back of strong economic data. Third is that they want to be very patient with inflation. We've been in a very low inflation environment—below 2 percent core inflation—for over three-consecutive years now. This is the longest stretch of weak inflation that the United States has experienced in almost 50 years. So you can understand why the Fed would want to be very patient with inflation.

When the first move happens—whether it's September or December or January, or after—it really doesn't matter very much for the yield curve and for longer-term investors. The pace of tightening is going to be much more important. And on that, the Fed has been very clear that it's going to be very slow and very gradual. Put yourself back in January. What has surprised you in terms of expectations for the year?
Antia: At the beginning of the year, I expected three things: disinflation, divergence and market adjustments to imminent rising rates. Those have played out mostly as I had expected.

On the disinflation front, certainly we remain in this soft patch of inflation. On the divergence front, back at the beginning of the year, there was a very strong expectation that the Fed would move in March. And then that expectation shifted to June. And now it's shifted to September. So there's been a bit of a divergence—a delayed impact, if you will.

But as far as markets go, certainly price and valuation adjustments are going to need to take place to account for the turn in the interest-rate cycle. I'll also say that most of the price adjustments will come ahead of the first rate hike.

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