There is no doubt that rock-bottom interest rates and three rounds of QE have helped the US economy to get back on track, however the strong US dollar dogged the corporate reporting season and the slowdown in emerging economies has yet to be fully played out.
US factory activity contracted in November and the ISM manufacturing index dropped to a six-year low as weak overseas demand was compounded by a strong greenback.
Ms Yellen may be hesitant to hike rates in a year when many central banks are loosening their policy.
Headline inflation is being hammered by commodity prices and there is no sign of that changing anytime soon.
Core inflation is creeping higher but it is just shy of the Fed’s 2% target, and in the past the inflation rate has been closer to 3% when the hiking process began.
The US dollar hit its highest level since 2002 this year and it is currently up over 10% year-to-date, and should rates start to rise the greenback will stay in demand.
Gold has fallen out of favour with traders as the prospect of a rate hike has taken the shine off it; should the Fed raise rates gold will continue to be punished as investors flock to interest bearing products. Base metals and energy markets will also suffer from a tightening of the Fed’s policy as they are priced in US dollars.
In the short-term, stocks will suffer from a rate hike. It might provide a buy-the-dip opportunity as historically stock markets have rallied post interest rate rises in the medium-term, as it suggests the US economy is strong enough to withstand higher borrowing costs.
Janet Yellen has talked about a rate hike for so long if she doesn’t pull the trigger it will give the impression the US economy still isn’t strong enough, which could lead a rise in the US dollar as the ‘flight to safety’ trade takes hold, and sending stocks lower on this sign of economic weakness.