DuPont’s DD.N 2.7 percent fall weighed the most on the Dow. Unlike previous rate hikes, the U.S. is not the global driver of commodity demand.
Advertisement
But the Fed’s preferred measure of inflation, personal consumption expenditures, hasn’t hit two percent. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. Although much of this can be explained by plummeting crude oil prices, the core measure which excludes food and energy prices is tracking at just 1.3%, well below the Fed’s 2% target. Stock investors have had time to prepare.
Markets and analysts will focus on the exact language the Fed uses in its statement to justify the hike and describe how it will evaluate the timing of a second and subsequent steps.
Fed chair Janet Yellen said earlier this month that she was “looking forward” to a hike – which would be the first increase since June 2006 – saying it would be a testament to how far the economy has come since the downturn.
Some economists, including some inside the Fed, have opposed the move, arguing that the economy remains vulnerable to slower growth elsewhere in the world, and that there is no compelling reason like signs of inflation that would justify the move now. There are projections for growth, unemployment and inflation (how fast prices go up).
While the inherently “bullish” mainstream media, and Wall Street analysts, cheered the recent uptick in employment (despite being primarily comprised of individuals working multiple part-time jobs) as clear evidence for the Fed to act, the Fed’s own Labor Market Conditions Index is not confirming the same.
“What matters most is the market perception, and subsequent reality, of the future trajectory of Fed actions”, the asset management team at Amundi Smith Breeden told clients in a research report.
That said, over the last two decades we’ve lagged the Fed by a mere three months so maybe the May call could be the smart one.
To attract this more reluctant spender, retailers will most likely have to ramp up their discounts at a time when the race-to-the bottom is becoming even more competitive.
Markets on Tuesday set a positive stage for the Fed’s potentially historic turn.
First, the good news: Economists do not see rapid-fire rate hikes in the cards. That would reinforce concerns about the strength of the USA economy.
“Even after several rate hikes, the cost of funds will remain exceptionally low”, Webb said. The problem is the word “average”. And money in the bank will collect less interest, considering that banks usually hike loan rates well before (and of course more) than they raise interest on savings accounts.
Advertisement
After more than a year of posturing and a couple of false starts, the U.S. central bank is seen raising rates by a token 25 basis points. “Holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and thus undermine financial stability”. It’s very doubtful that the Fed will tighten as aggressively as they did in the 2004-6 cycle and a big thing we’ll be watching today is what kind of signals they do give as to their future intentions. Stanley said. “They’re going to do what they can to soothe the market”.
