Looking back, we have learned that it is very rare for the Fed to raises interest rates when stocks are acting as badly as they have been and are being now.
Should the FOMC follow through with their expected fed funds rate hike Wednesday, it would be the 1st time since Y 1994 they tightened in such challenging market.
Where we stand now, the S&P 500 is down over the last 3, 7 and 12 months, a backdrop that has accompanied just 2 of 76 rate increases since Y 1980.
The statistic is another look into the divide between markets and the economy, a split that has forecasters trying to draw connections between the 2 Key components
While. 50% the S&P 500 sits in a Bear market and groups like financials and transports fall day after day, some Key economic data bolster the case of the rate hawks.
This is 1 reason investors will be focused on commentary about financial or market stability, looking for signs that the latest volatility is catching the eye of Fed officials.
This market action presents a dilemma for the Fed, as the financial markets are telling them no more hikes. But the economic data suggest that further tightening may well be appropriate in here.
While the role of markets in the Fed’s policy calculus is endlessly debated, the fact is, since Y 1980, rate hikes have almost always come during good times for stocks.
On average, the S&P 500 is up 4.1%, 6.9% to 11% over the previous 3, 6 and 12 months when tightening occurs. The exception was in the 1970’s, when the Fed ignored market turmoil to combat inflation that was running at 7%+ a year.
The economy looks nothing like that now.
Consumer prices have stayed below 3% for the past 6 years and at a growth rate of 3.5%, it is hard to frame GDP as overheating. The opposite concern seems to be driving equities, with recession mentions getting more numerous in professional commentary. But there is no recession is sight.
While a Fed report earlier this month said it viewed financial-stability concerns as moderate the stock market rout that has erased $3-T from American equity values has many calling for a halt.
The Big Q: Are stocks be sending a message that the data has yet to reflect?
The Big A: Some strategists think Yes.
They are convinced 8 rate increases in 3 years have been enough for an economy threatened by everything from US-China trade dispute to BREXIT and a global growth slowdown.
The Fed is scheduled to announce its decision on Wednesday, 19 December at the conclusion of its 2-day meeting. And most economists predict a rate increase.
We believe that the Fed needs to deliver on a more dovish stance to avoid disappointing financial markets.
A rate increase looks likely, but signs of flexibility from the Fed have caused markets to scale back the expected pace of tightening in Y 2019.
Recall, that in December 2015, then Fed Chairwoman Janet Yellen pushed ahead with the 1st rate increase of the cycle just 2 months after the S&P 500’s worst fall in 4 years. Stocks summarily slid into a 10% correction and she delayed more hikes for a year.
This latest equity sell-off has been bad enough for Fed officials to take notice.
Comments of “financial stability” have increased in Fed commentary to the year’s high of 5.7% while comments on inflation and employment dropped, according to data from speeches, statements, minutes or testimonies.
Last month, Fed Chairman Powell dialed back his aggressive stance after his October remark on rates was blamed for the S&P 500’s worst month in 7 years.
Still, the pain being felt by investors in stocks probably has not gotten to a pace where the Fed would abandon tightening, according to Bank of America.
That Chairman Powell went ahead with another increase right after the equity rout in February showed may be less worried about financial markets than Mrs. Yellen was in Y 2015.
“Partly this could be a difference in approach of the individuals and economic conditions,” 1 strategists that I read wrote in a note. However, “With 200 basis points of rate hikes under the Fed’s belt today, they are in a better position and are more able to manage policy to the real economy (their job) rather than the market.”
We wait, We see…