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Get Ready for a Fed Circus on Wednesday
07/28/2014 5:00 pm EST
The FOMC meeting on Wednesday will include any announcement about a change in its benchmark short-term interest rate, but MoneyShow’s Jim Jubak thinks it may also bring about total confusion and market volatility.
The Federal Reserve’s Open Market Committee (FOMC) meets Wednesday and will announce any change in its benchmark short-term interest rate—now at 0.25%—that afternoon.
I’m not expecting any change in interest rates from the Fed. We’ll stay at what is essentially 0% now and into 2015.
But the Fed will have to address the apparent strengthening of US economic growth in the statement that it releases with that interest rate decision.
And I expect that will be lead to a total circus on Wall Street.
The Fed and its chair Janet Yellen have made it clear over and over again recently that 1) the decision on when to raise benchmark rates depends on the economic data, 2) that growth in GDP is important but not the only or most important data point, 3) that a 6% unemployment rate, which was the most important benchmark for a while, isn’t a cast-in-concrete benchmark, and 4) that the Fed wants to see evidence of a sustained US recovery.
That was all well and good as a system of signals to the financial markets as long as GDP growth was 2%—or the negative 2.9% of the first quarter—and as long as the unemployment rate was over 6%—but recent numbers have put the economy so close to the Fed’s benchmark data points that it has revived discussion at the Fed about moving up the date of the first interest rate increase from mid to late 2015 or early 2016 to early 2015. For example, Dallas Fed president Richard Fisher gave a speech on July 16 that advocated an earlier interest rate increase. "I believe we are at risk of doing what the Fed has too often done: overstaying our welcome by staying too loose too long,” Fisher said.
Nothing terribly new in that comment from this source, but recent data on unemployment, jobs, and GDP growth means that the Fed will have to try to explain what its policy is on interest rates as the numbers push the central bank closer and closer to its stated benchmarks.
And, of course, it won’t make it any easier for the Fed to explain its thinking to the market’s satisfaction that crucial economic numbers won’t become public until after the Fed meets. The staff and members of the Federal Reserve will, of course, have seen this data, but the markets won’t see the most recent weekly claims for unemployment until Thursday, the day after the Fed’s announcement. The July jobs numbers, which could bring a drop below 6% unemployment won’t get a public release until Friday.
Second quarter GDP numbers will be released Wednesday morning before the Fed speaks. I don’t know whether that will add to the confusion or produce some clarity. (I suspect the former.) The consensus among economists is that the US growth rate will show a big rebound to somewhere above 3% for the quarter.
Good luck to the Fed explaining whether that growth rate meets its criteria for “sustainable” or not.
I think if you expect volatility and confusion on Wednesday, you aren’t likely to be disappointed.