FEDERAL RESERVE HIKING INTEREST RATES AGAIN – Is The U.S. Economy Really Doing Well?
I’ve got a suggestion for a short-term trade for profit from the Federal Reserve’s interest-rate-setting meeting this week.
Wait 30 minutes after the Fed has announced its decision—expected at 2 p.m. New York time on Wednesday. Then bet that the S&P 500 SPX, +0.45% or other broad-market index will soon move in the opposite direction of how it immediately reacted.
The rationale: The Fed’s decision has virtually no real-world stock-market consequence besides giving an obsessive-compulsive Wall Street something to endlessly analyze — even with a new “dot plot” showing Fed officials’ expectations about how quickly interest rates will rise and a news conference with Fed Chairwoman Janet Yellen. To use a quotation often attributed to Star Trek’s Dr. Spock: A difference that makes no difference is not a difference.
It’s therefore a good bet that the stock market’s reaction to the Fed’s interest-rate announcement will not be based in reality and will soon be corrected.
Read: Here’s what the Fed will signal when it hikes interest rates
I know you will be shocked—shocked!—to learn that Wall Street is obsessed by something that has no real-world significance. But there are at least two reasons why the timing of the Fed’s rate increase is not even close to being the big deal that most are assuming it is.
The first is related to the present value of a company’s future sales, earnings and dividends. As you no doubt remember from Finance 101, other things being equal higher interest rates mean that we need to more deeply discount future sums when calculating present value. Sluggish inflation has made the Federal Reserve’s efforts to get interest rates back to normal levels a lot harder.
The Fed is expected to raise interest rates Wednesday by a quarter point, and it has forecast another rate hike for this year. But the recent slowdown in inflation has become a red flag for markets, which doubt the Fed’s ability to hike a second time before year end.
The Federal Open Market Committee is expected to raise the fed funds target rate to 1 to 1.25 percent.
Fed Chair Janet Yellen holds a post-meeting briefing and is expected to provide some more detail on the Fed’s $4.5 trillion balance sheet. The Fed hopes to begin shrinking that balance sheet this year by scaling back a program to replace Treasury and mortgage securities as they mature.
Inflation will already be top of mind for markets Wednesday, even before the Fed’s 2 p.m. statement. The consumer price index is released at 8:30 a.m. ET, as is the latest retail sales report. That CPI report is expected to show that May core inflation was running at an annual rate of 1.9 percent, the same as April. CPI fell below 2 percent in April for the first time since late 2015. u.s. usa america “united states” economy “interest rate” interest economist bank banking “bank account” savings bitcoin currency forex usd dollar “forex trading” market “stock market” jobs inflation food supermarket change forecast “market forecast” portfolio debt “credit card” loan mortgage global world wealth gold silver bullion “sell gold” investment invest investor “gold bullion” The Fed’s preferred inflation measure, the PCE deflator, also came in at a weaker 1.5 percent, well below the Fed’s 2 percent inflation target. Few economists expect major changes in the Fed’s overall forecasts this time around, although the extent of jitters on inflation moving away from the Fed’s 2 per cent goal will likely be reflected at an individual level.
Markets are, however, increasingly anxious for the Fed to give a clearer steer on the timing and details of its previously announced plan to reduce this year its $4.2 trillion portfolio of Treasury debt and mortgage-backed securities, most of which were purchased in the wake of the financial crisis to help keep rates low and bolster the economy.
“If the Fed is serious about reducing the size of its balance sheet this year and wishes to communicate those plans well in advance, it is running out of time to do so,” said Michael Pearce, an economist with Capital Economics.