The Federal Reserve decided against raising interest rates at this week’s meeting and expectations have now shifted to later this year or even at the beginning of 2016. A December rate hike is a strong possibility, with a probability of 41 percent based on the positions of speculators today. Since these odds fluctuate, the December number could easily climb above 50 percent. A January 2016 rate hike currently is currently a 50-50 proposition; March odds are over 60 percent.
The Fed’s statement was unremarkable, with only one noteworthy change, being the following sentence: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” This caused investors to believe China was the factor keeping the Fed from hiking. However, the very next sentence began with “nonetheless,” indicating the Fed doesn’t see U.S. economic growth being impacted.
Assuming nothing significant happens over the next three months, a December rate hike seems most likely. Recall the taper fake out in 2013 when investors widely expected the Fed to start the taper in September 2013, only to delay until December. Yellen may be pursuing the same strategy here in order to fully prepare the market.
The impact of the no decision on financial markets was initially negative. After a quick reaction rally, stocks have since moved lower. Currency traders initially sold the U.S. dollar, but then bought it back due to speculation the European Central Bank may increase quantitative easing to push the euro lower. Bonds have moved higher, as has gold. Copper and oil prices fell, likely due to China concerns. Since it usually takes several days for the market to find its footing, investors should not bank on these trends continuing. Of all of the possible scenarios, the one most likely to survive is the dollar uptrend since rival central banks will likely weaken their currencies as they know the Fed won’t aid them by hiking rates.
Economic data remains solid. Retail sales increased 0.2 percent in August, down slightly from last month’s 0.7 percent gain, but still at a good annualized rate. Home builder confidence hit its highest level in a decade, and weekly jobless claims were 264,000, below estimates of 275,000 and down from last week’s 275,000 announcement.
Even though stocks fell in the wake of the Fed’s decision, stocks are set to finish the week with a small gain. The S&P 500 Index is up 0.7 percent for the week in midday Friday trading, the Nasdaq up 1 percent. While there has been a great deal of volatility in the market, which has sent stocks higher and then lower, the steady recovery trend remains in place since stocks bottomed on August 24.