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Stick, Twist Or Bust: How The US Federal Reserve Could Destroy The FTSE 100 This Week

They are calling it the most important meeting of the US Federal Reserve in years. The outcome could shake the world, and the FTSE 100 is right in the firing line.

On Thursday, the Fed will decide whether to hike interest rates for the first time since 2006, by the Earth-shattering sum of 0.25%. It doesn’t amount to much, but if rates do rise, the impact will be disproportionate. Markets will see this as a signal that the rate cycle is turning. Analysts will instantly start speculating about the next rate hike. The days of record low interest rates will be numbered. We will be in a new world.

Sticky Decision

Risky assets will be hit hard, as will emerging markets. Their dollar-denominated debts will be more costly to service as markets price in added risk. Defaults can’t be ruled out. FTSE 100 companies generate three quarters of their earnings overseas, particularly in the oil and mining sectors, and will get swept up in the panic.

Given the dangers, markets are expecting the Fed to stick where it is on Thursday. The probability has been reduced to just 28%. It’ll happen in December instead, they say. The global economy is slowing. Equity and bond markets are already volatile. Inflation is negligible. The dollar is strong and a rate hike will only make it stronger. The World Bank and IMF are both warning of the dangers. This is a mighty gamble.

Time To Twist

There are equally good reasons for the Fed to twist. US unemployment is at a lowly 5.1%. Quarterly GDP growth was upgraded to 3.7% to the end of August. US retail sales for August were weaker than expected, but still firm. Inflation has bottomed out and could quickly climb if the oil price recovers: the Fed needs to act ahead of the curve. There are strong arguments both ways.

Personally, I hope the Fed twists rather than sticks and puts a stop to this “will they, won’t they” nonsense. Yes, it will hurt. Just as the 2013 taper tantrum hurt. And the Chinese devaluation. But markets survived both of those, and they will survive higher rates as well. A rate hike will hurt, but it will also hurt in December.

Card Sharps

Ironically, the Fed will also spook markets if it takes a dovish line on Thursday, by suggesting things are worse than we think. Stick, twist or bust, markets are heading for a turbulent few days. Fortunately, private investors don’t have such a complicated a decision to make, no matter how the cards fall. If you are investing for the long-term, stock market volatility is your friend. You can turn any dip to your advantage by seizing the opportunity to load up on your favourite stocks or tracker funds at reduced prices.

Then all you have to do is hold them for the long term, re-invest your dividends for growth, and wait for stock markets to work their long-term magic. Whether the Fed sticks or twists tomorrow, long-term investors who stick to these Foolish principles have no reason to fear going bust.

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