Will a Surprise Fed Rate Hike Spook the Markets?
The markets are near record highs, China has a 6.9% GDP (our less than exciting GDP report comes out tomorrow), Europe has settled down, the currency markets are calm and investors are back to being complacent. What better time than today for the Fed to raise rates?
Remember, the Fed was going to raise rates in July, but they put it off to September and, in that meeting, they said:
After assessing the outlook for economic activity, the labor market, and inflation and weighing the uncertainties associated with the outlook, all but one member concluded that, although the U.S. economy had strengthened and labor underutilization had diminished, economic conditions did not warrant an increase in the target range for the federal funds rate at this meeting. They agreed that developments over the intermeeting period had not materially altered the Committee’s economic outlook. Nevertheless, in part because of the risks to the outlook for economic activity and inflation, the Committee decided that it was prudent to wait for additional information confirming that the economic outlook had not deteriorated and bolstering members’ confidence that inflation would gradually move up toward 2 percent over the medium term.
That meeting was held on September 17th and the S&P 500 was at 1,950, having just recovered from the August crash. The Fed’s non-move did not have the desired effect and the market dropped right back to the lows after their announcemnt that the economy wasn’t quite strong enough to handle a rate hike.
Now we’re 5% higher than we were and the Fed is essentially damned if they do or damned if they don’t hike rates (which is why we’re short the indexes up here) and they do NEED to hike rates – that’s very clear from reading the minutes. So why wouldn’t they hike rates today, when the conditions are favorable and the markets can stand a small hit? Who knows where we’ll be on Dec 16th (next meeting) or Jan 27th?