To some, the rally in equities since the Great Recession has been a symptom of central bank largesse, and financial markets have been in Federal Reserve-driven mode for an extended period of time.
According to Dominic Konstam, global head of rates research at Deutsche Bank, the shoe is now on the other foot: We have a market-driven Fed.
The strategist has written that liftoff, in terms of interest rates, will come only when the market is "begging for it." He appeared on BloombergTV to discuss exactly what that call entails.
In the run-up to the September Fed meeting, a number of strategists cited the relatively low odds of an interest rate hike as a sign that the central bank would stay on hold for fear of roiling the markets with a move.
Konstam echoed these sentiments. "At the end of the day, the market expectations will determine whether or not the Fed can actually do anything," he said. "And the Fed cannot fly in the face of the market if the market is saying, 'please don't raise rates,' without the risk that things are very very damaging in terms of the reaction."
The probability of a hike implied by federal funds futures will have to be a lot higher before the central bank is able to act, Konstam believes.
"I think you have to give the market a lot of credit, that it kind of understands things—perhaps a little bit better than, certainly, some of the members of the FOMC," he said.
In the meantime, continued commentary on the issues the U.S. central bank needs to see resolved (a list that includes the status of China and other emerging markets, inflation, and wages) will help condition the markets for a hike as progress is made and recognized by monetary policy makers.
The strategist opined that the probability of the Fed keeping rates on hold until 2017 is "up there."
The central tenet underpinning the strategists' worldview is the extremely low level of core inflation once the rise in housing costs is removed from the mix:
He views housing inflation as indicative of structural issues, noting that it's been an extremely large contributor to core inflation 's annual rise of 1.8 percent.
Core consumer price inflation, without counting housing, was running at 0.6 percent year-over-year, said Konstam, and this adjusted metric will probably continue to decelerate in 2016.
The notion that the market is fed up with near-zero interest rates isn't a foregone conclusion, he argued.
Some strategists have contended that abstaining from liftoff was the reason why equities moved a leg lower, reasoning that beginning the process of normalization would be indicative of a turn to, well, normality. By this view, a rate hike would be positive for risk assets.
Konstam took umbrage with this reasoning, pointing out that there could well have been a massive decline in stock and bond prices in an alternate universe in which the Fed elected to hike rates last week.
What played a role in the market's reaction, he believes, were the reasons monetary policymakers gave for keeping rates near zero. If the Fed decided to maintain the status quo because it wanted more of a good thing (higher nominal growth), the reaction may have been more constructive. But framing the non-hike as attributable to concerns about global growth was clearly not positive for risk appetite.