Bad News Is Good News in Run Up to Wednesday Fed Meeting
03/16/2015 5:11 pm EST
If the Fed is thinking about a June interest rate increase, it’s reasonable to expect some indication of that timing in the March 18 statement, and MoneyShow’s Jim Jubak points out that any language suggesting that would be a big deal to the financial markets.
I expect global financial markets to hang on the wording in the Federal Reserve’s press release after the Wednesday, March 18 meeting of its Open Market Committee and any parsing of that language by Fed chair Janet Yellen in the subsequent press conference.
We got a preview of what the guessing on the timing of the Fed’s first interest rate increase might mean for the US stock market today. Behind today’s rally were negative economic reports that convinced, at least, some traders that the odds of a June interest rate increase had worsened and that September had become a more likely candidate.
First off, the Federal Reserve reported a third consecutive monthly decline in manufacturing production, a 0.2% drop in February after a 0.3% fall in January. The weakness was primarily due to a decline in motor vehicle production of 3% in February, after a 0.6% drop in January. The fall in manufacturing production kept industrial production as a whole to 0.1% increase in the month. That was better than the 0.3% (after revision) drop in January, but still way short of the 0.3% increase projected by economists surveyed by Briefing.com.
This morning also brought a drop in confidence among US homebuilders in the national Association of Home Builders/Wells Fargo sentiment survey. Confidence dropped to 53 from 55 in the survey to an 8-month low. Economists surveyed by Bloomberg had been looking for a gain in confidence to 56.
Wednesday will be the Fed’s first meeting since January 27-28 and it will, therefore, carry more weight since the market has been looking for guidance on what the US central bank meant when it used the word patient in its last statement.
Here’s what the Fed said back on January 28: “Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.”
Since that meeting, and that statement, the financial markets have read data on job growth, initial claims for unemployment, and inflation as an argument for an initial interest rate increase by the Fed in June instead of September. That shift in consensus is a major reason that US stocks have stalled after hitting a peak on March 2 at 2117.39 on the Standard & Poor’s 500 (SPX). On Friday, March 13, the index closed at 2053.40 for a drop of 3% from the March 2 high.
The fear is that the Fed will remove patient entirely from its statement and replace it with something that indicates that the decision on the timing of an interest rate increase isn’t quite so data dependent as the Fed has made it sound in recent statements. Any language that suggested the Fed has seen enough of a trend so that it will be able to make a decision without extensive confirmation would be a big deal to the financial markets.
The Fed’s next meeting isn’t until the very end of April—the 29th—and then the meeting after that is June, the meeting at which, the market consensus says, the Fed could raise rates.
If the Fed is thinking about a June interest rate increase, it’s reasonable to expect some indication of that timing in the March 18 statement.
Anything that strengthens belief in a June interest rate increase will strengthen the US dollar against the euro and, especially, emerging market currencies, and is likely to push down the price of oil (since that commodity is priced in dollars).