What Traders May Expect After Fed Rate Hike Wednesday

09/27/2018 10:52 am EST

Focus: MARKETS

Nell Sloane

Principal, Capital Trading Group

Stocks are steady Thursday morning as traders are digesting the Fed’s latest round of interest rate hike and commentary. The Fed elected to raise rates for the third time in 2018, writes Nell Sloane.

Keep in mind, this follows three rate hikes in 2017, two rate hikes in 2016, and one rate hike in 2015.

Looking out on the horizon, most insiders are looking for yet another interest rate hike in December and perhaps three more rate hikes in 2019. Let’s hope the Fed is right with their current projections and forecast that the U.S. economy will stay strong through at least 2019.

Let me remind you, the Fed funds rate was raised Wednesday by 25 basis points to a range of 2 percent to 2.25 percent. I bring this to our attention, because I remember famed investor Bill Gross once saying, in each instance where the Fed funds rate was higher than the nominal GDP growth rate, assets such as stocks and housing ultimately fell.

With the Fed projecting GDP growth at only 2.5% out on the horizon, it makes me feel we are definitely getting closer and closer to bumping up against the ceiling.

In fact, their own estimates show GDP growth slowing to 2.0 percent in 2020 and to 1.8 percent in 2021.

If Bill Gross is correct in his analogy, continuing to raise rates into what could be slowing GDP growth, could create some hiccups.

The stock market is always forward looking, perhaps to the extent of six to twelve months. Meaning it’s not about what is happening today, but rather economic growth and outlook many months ahead.
The Fed is definitely walking a very narrow tightrope and trying their best to unwind the massive multi-year rounds of Qualitative Easing.

I have to imagine the next few interest rate hikes will be meet with more and more scrutiny.

Turning towards more traditional economic data, new home residential sales rose +3.5% in August, which was better-than-expected and reverses two-straight months of declines.

Sales rose to a seasonally adjusted rate of 629,000 units, a 12.7% year-over-year increase, with an average selling price of $388,400.

As for today, traders will be digesting updated Durable Goods Orders, as well as International Trade and Jobless Claims.

Cheers,

Nell

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