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Market Wrap-up for Mar. 16 - How to Decipher This Week's Fed Meeting

Tom Reese Mar 16, 2015


The economy is entering a crossroads, with improving jobs data contrasted with weakening economic indicators, a runaway dollar, and ballooning equities and startup valuations. This week’s two-day Fed meeting, held on March 17th and 18th, could be the most important one in many years.


Rate Raise Coming? Not Likely.


I’ve maintained the same mantra over the past few years in regards to an interest rate hike: I’ll believe it when I see it. Every single year since 2009, the majority of economic pundits have expected the Fed to boost interest rates, and it still hasn’t happened yet.

Teddy Roosevelt once opined, “In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.” Well, the Fed has done absolutely nothing in regards to interest rates since cutting them to 0% in December 2008. That’s well over fifty meetings in a row without a policy change. In my opinion, Janet Yellen and her colleagues are simply afraid to do anything. They’d rather just stay the course and risk waiting too long to boost rates than do so too early. With the S&P 500 posting three straight weeks of declines, I imagine the Fed is even more fearful than usual of spooking the markets.

Since the Fed now speaks only in vague riddles, Fed watchers will key in on the word “patient” in the statement following this week’s meeting. If the Fed drops the word “patient” when describing its forward policy, people will assume a rate hike is coming relatively soon. If “patient” is still in there, it becomes more likely we won’t see a rate increase this year. Sadly, this is the state of affairs we’re left to deal with now.


If No Rate Hike News, Then What?


Aside from the hazy indicators surrounding a potential rate hike, Fed watchers will be keying on committee members’ thoughts on key recent economic developments, including:

  • Improving jobs data, but a lack of wage growth
  • Weakening manufacturing data
  • Rapidly worsening earnings expectations for the S&P 500 (I’d love to see them address this, but I doubt they will), and
  • Continued anemic mortgage applications

The Fed’s stance on these issues could be the real indicator on potential policy changes, since it only speaks of interest rate policy in very vague generalities (a classic strategy when you don’t know what to do is to use a bunch of words, but say very little. The Fed has mastered this technique over the past couple years).


The Bottom Line


No one expects the Fed to actually make any policy decisions in this week’s meeting, but that doesn’t mean the markets won’t react sharply to it. Expect a big move either way, as the markets are increasingly on dangerous and volatile footing.

The key strategy for long-term investors is simply — to borrow a phrase from the Fed — to remain patient.

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