Can You Believe the Fed?

08/01/2014 12:01 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The surprisingly strong GDP number has not changed the Fed's course says MoneyShow's Jim Jubak and he wonders when rates will really start to rise.

For the week ahead and, really, well weeks ahead, the issue is whether investors, the stock market, Wall Street, really going to believe the Fed when it says, hey, yeah, growth looks really good but we see slack in the labor market so we're not going to raise rates any faster than you thought a while ago.

Okay. What happened on Wednesday, July 30, was that we had the first read on second quarter US GDP and it came in at 4%. Huge growth number. This is especially huge because, for the first quarter, the unrealized number was a contraction of 2.9%., that was revised upward to a contraction of just 2.1%, but this is a big rebound and it lets Wall Street, which has basically been arguing all along that the first quarter contraction doesn't mean anything, it's the result of winter weather, it buttresses that view so you've got the 4% growth, that's really what you had in the second half of 2013, so it looks like a trend with this weird thing in between so the US economy looks like its growing really, really strongly. All the signs are that the jobs market is going to show pretty soon a dip below 6% unemployment.

Now, what the Fed said was, hey, we know we're seeing strong growth but if you look at other measures, we're seeing slack in the job market. We're not ready yet to say the economy is on a sustained path of 3.5% of 4% growth so we're going to keep our interest rate policy pretty much where it is. We're going to leave rates at zero, continue to get rid of the buying of mortgage-backed securities and Treasuries, cut that another $10 billion a month, but, basically, this is what we expected. We don't see any reason in these strong growth numbers to change the calendar, which looked like first rate increase somewhere around the middle of 2015 or maybe early 2015. Now, if you look at this objectively, you can say, well, all this data is changing and the Fed is not changing policy.

I think that's one read that Wall Street is likely to come away from so what you should be watching is something called the Fed Futures Market. This is a bet on where rates are going and it gives you odds on when the rate increase is going to come. If we start to see this moving toward greater bets, greater waiting toward early 2015, I think you'll start to see interest rates on Treasuries and existing bonds start to rise and that's going to put a real crunch on the Fed because they're going to try to talk that down again. they really don't want those rates to go up until they're ready to raise short-term rates so the question is, you're going to get a battle of words, I think, words and wills as the Fed tries to control these expectations as the market starts to say, well, yeah, I know what you're saying but look at this data, it's pointing in a very different direction, and that's what I'd be watching over the next couple of weeks because, right now, interest rates are really the key thing to figuring out where stock prices are going to go.

Related Articles on STOCKS