The past week was relatively uneventful from a market perspective, especially when compared to the significant volatility we experienced during August. With the economic situation in China and the volatility in the Shanghai Index subsiding for the moment, all eyes turn to this week's Fed interest rate decision on Thursday.
I continue to expect the Fed to increase interest rates by 0.25% on Thursday. This long-awaited increase in the Fed Funds rate will be the first interest rate increase since 2006. The recent U.S. Economic data supports the rate increase, especially the improving employment statistics and solid consumption data. Going into the Fed meeting, I would be cautious on risk markets as the risk to the downside seems greater in the short term. I would also remain defensive in U.S. Treasury bonds.
If the Fed doesn't increase interest rates and cites either low inflation or global market volatility, I would look to cover any existing defensive positions. There is an old adage that still applies today: "Don't fight the Fed." I expect this to hold true in the near term, no matter what the Fed decides.
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