The stock market is at the mercy of the US Federal Reserve

We all know the US Federal Reserve is the most powerful central bank in the world, by a country mile. Most of us will have heard the phrase "Never fight the Fed", because there can only be one winner. Chairman Janet Yellen can move markets simply by clearing her throat. Members of the rate setting Federal Open Market Committee wield similar superpowers. Markets hang on their every grunt, nudge and wink. But right now, the amount of attention they're getting is bordering on ridiculous.

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Game on

Throughout 2016, market analysts have played an increasingly tiresome game of 'will they, won't they?'. Raise rates, that is. The Fed hiked them by just 0.25% in December, and although there were other reasons for January's instant market rout, those meagre 25 basis points played a key part. For many, this confirmed suspicions that markets simply aren't in a position to withstand higher borrowing costs.

Analysts started 2016 predicting another four base rate hikes from the Fed, but so far we've seen none. I was always surprised by those bullish forecasts, given the fragile state of the global economy, but even I would have expected at least one measly US interest rate hike thus far.

Hawks v Doves redux

We may still get it this month. The next FOMC meeting is on 20/21 September, and the build-up has triggered increasingly fevered speculation the Fed will bite the bullet this time. Accordingly, every time Fed hawks flashes their claws, markets plunge. So when vice-chairman Stanley Fischer said at Jackson Hole in August that he still saw the possibility of two rate hikes this year, down stocks went. Last Friday was shaping up to be a dull trading day, until FMOC member Eric Rosengren opened his mouth to warn that the Fed risks creating more problems in waiting to raise rates, when markets plunged again.

Every time a dove flies out of the traps, markets move just as quickly. So when Fed governor Lael Brained suggested there's no hurry and low rates are the new normal, up stocks surged.

Ready, Feddy...

September is always a nervous time for investors but now it seems we only need to worry about one thing. Forget Brexit. Ignore Eurozone or Japanese easing. Chinese GDP data - who cares? All that matters is who emerges victorious in the face-off between the hawks and the doves. Data matters (such as non-farm payrolls, inflation, business investment and house prices) but only in the context of how it will affect Fed thinking. That's how dependent markets have become on easy money.

For what it's worth, I don't expect a rate hike in September. If I'm wrong, markets will have a bad month of it. If I'm right, they'll have a good month. The Fed decides all. Traders will be hanging on every Fed utterance but long-term investors don't need to pay such close attention. If you're investing for five, 10, 15 years or longer you can afford to ignore short-term market movements. Mercifully, you can even ignore the Fed.

Investors need to focus less on the Fed and more on their own actions. One small mistake in uncertain times like these can cost you dear.

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