The Hidden Cost of Volatility Drag

The US Federal Reserve has been under pressure from various quarters to raise interest rates, as the economy continues to show signs of slowing down. Christine Birker, a renowned economist, believes that rates will not rise until December and January, given the performance of retail sales and unemployment in those months.

Regan, another leading expert, shares his concerns about raising rates at the same time as other central banks, such as Australia's European Central Bank (ECB). He argues that if the US makes a step before the ECB, currency markets will become wild, throwing a wrench in the recovery. This is particularly true for the dollar, which could see its value plummet.

While Japan's government has been looking to stimulate growth through stimulus programs, Birker expects interest rates to rise in that country as well. She believes this would have a positive impact on their debt outlook and subsequently increase rates in the US. However, other central banks like Australia will likely follow suit, and the ECB may be forced to raise interest rates before the US does.

Portfolio/Investment Implications

The interest rate policy under pressure in the US has significant implications for investors. Assets like the Investment Grade (IG) corporate bond index (IEF), Country stocks (C), Exchange-Traded Funds (ETFs) such as Vanguard's Total Stock Market ETF (VTSAX), and Gold (USING) are likely to experience volatility due to increased interest rates.

The US dollar is also expected to see its value decrease, making assets like the Euro-denominated bond index (EEM) and German stocks (DGS) more attractive. Investors who hold these assets may need to adjust their portfolios accordingly to mitigate potential losses.

Actionable Conclusion

As the US Federal Reserve continues to tighten monetary policy, investors should be cautious about rising interest rates in 2010. The ECB's rate hike before the US could lead to currency market instability and negatively impact the dollar's value. To minimize risk, investors may want to diversify their portfolios by investing in assets that are less sensitive to interest rate changes.

In conclusion, the analysis of interest rate policy under pressure reveals a complex situation for investors. While the Federal Reserve is likely to raise rates in 2010, it will be crucial for central banks like the ECB to coordinate their policies and avoid triggering a market meltdown.