Market Wrap-up for Jan. 6 - Waiting for the Fed

Market Wrap-up for Jan. 6 – Waiting for the Fed

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U.S. equity markets held steady at today’s opening bell, after major indexes posted significant declines during yesterday’s sell off. Oil prices continue to fall, while 10-year Treasury yields slipped below 2%. Yesterday, we mentioned several important stories investors need to follow this week – one of them being the Fed minutes.

When Will the Fed Raise Rates?

The Federal Reserve is slated to release its minutes from its latest meeting (which took place mid-December) tomorrow. While for the most part, investors haven’t seen too much change in the Fed’s outlook in recent months, many are looking for any hints of when exactly the central bank is planning to raise rates. It should also be noted that Janet Yellen has stated that the central bank is unlikely to raise rates during its next to policy meetings, which are scheduled for Jan. 27-28 and March 17-18.

What’s also important to realize is that the rate hike would be the first in nearly a decade. Given the unprecedented actions taken since the financial crisis, many remain understandably uncertain about how exactly the market will react to such a “drastic” change of monetary policy, and understandably skeptical that the Fed will actually raise rates any time soon.

In the short term, investors should realize that markets will likely be in for some volatility as they adjust to the possibility of a “quasi-hawkish” Fed.

A Quasi-Hawkish Fed

The term “quasi-hawkish” is by no means a fancy financial term, but I do think it is the best way to describe the stance of the central bank.

The Federal Reserve is currently weighing several significant factors against raising interest rates. The first being that inflation has remained well below the Fed’s 2% target and the fall in global oil prices likely will drag inflation down further in the coming months.

The second important factor is the greenback’s surge against major currencies. Remember that a contractionary monetary policy will create an even stronger dollar – which in the short term is good for domestic consumption, but ultimately bad for foreign trade.

Furthermore, the labor market has certainly come a long way since the depths of the financial crisis. What is troubling, however, is the sluggish growth in wages. The housing market, too, has shown recent signs of price weakness, along with continued multi-year lows in mortgage applications.

All of these issues play a major role in how the markets will react to a rise in interest rates. If the Fed is too aggressive (which it almost certainly will not be), it is possible that a hike could push the economy off-kilter. The central bank will need to proceed slowly and carefully when normalizing interest rates, because the current Fed-induced economy has by no means been a normal one.