What Will The Fed Do Next?
The Federal Reserve Board raised short term interest rates by a quarter point at its last meeting on December 16. Although the stock market reacted favorably on that day, stock prices have dropped sharply along with the price of oil in the early weeks of the new year. With stock markets around the world experiencing heightened volatility, it is not likely in our view that the Fed will raise rates at its next meeting on January 27.
The Fed has continually stated that it will be data dependent when assessing whether or not to raise rates. Considering the Fed’s dual mandate of maximum employment and stable inflation, they are receiving conflicting data about whether to raise rates at their next meeting. The U.S. reported stronger than expected employment gains of 292,000 jobs recently, which supports the case for another quarter point increase in the federal funds rate. On the other hand, the continued drop in oil prices is putting deflationary pressure on the economy, this supports the view that the Fed should hold off raising rates for now.
If the Fed does raise rates at its next meeting, there is an increased risk that the U.S. dollar will rise and put more downward pressure on commodities. This could destabilize markets globally and reduce inflation expectations going forward. In our view, the Fed will not risk this with the current state of global markets. If oil rebounded along with global markets, it would be much more palatable to raise rates.
The most likely outcome for the Fed’s next meeting is no change in interest rates, along with commentary acknowledging the continued moderate growth of the U.S. economy, along with a mention of the deflationary impact of lower oil prices.
The effect on the stock market to this outcome is hard to predict. In a best case scenario, the U.S. dollar will decrease in value and commodity prices and global markets will rise. In a worst case scenario, the market may interpret the Fed’s decision not to raise rates as a sign that the U.S. economy is not as strong as the Fed anticipated at its last meeting.
Ideal Asset Management’s Take:
The Fed will most likely hold off raising rates at its next meeting, which will be welcomed by investors. This may provide a temporary boost to global markets, but the long term direction of the market will be determined by the strength of corporate earnings.
All of the ideas expressed in this article are the opinions of Ideal Asset Management LLC
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