Amid Rampant Confusion

Going into Thursday, everyone – and we do mean everyone – is scrambling to predict which asset classes are most susceptible to a Fed hike.

As we explained over the weekend, there’s quite a bit of ambiguity this time around and not just because a third of Wall Street has never seen a rate hike in their professional careers.

The prolongation of ultra accommodative monetary policies across the globe (to the point that what was once “unconventional” might now fairly be classified as thoroughly “conventional”) and the failure of the Fed to normalize while it had the chance, has served to create a situation where Janet Yellen is effectively boxed in. Liftoff risks destabilizing an already precarious situation in emerging markets where a Fed hike risks exacerbating capital outflows, pressuring already beleaguered commodity currencies, and ultimately magnifying the scope of the tightening far beyond what 25 bps would normally entail by forcing EMs to liquidate more FX reserves to support their flagging currencies.