The Fed Open Market Committee (FOMC) concluded its two-day policy meeting yesterday with no real surprises. As expected, the Committee left the Fed Funds rate range unchanged at 0.25% to 0.50%. The vote to take no action passed 9-1 with only Kansas City Fed President Ester George dissenting.
The official policy statement noted that the economy continues to expand at a “moderate rate.” It stated that job gains in May were very weak but rebounded in June – nothing new there. The statement said that while household spending has been “growing strongly,” business fixed investment in plants, equipment and technology remains “soft.”
The Committee noted that inflation continues to run well below its 2% target. The statement also said that near-term risks to the economy have “diminished.” Many interpreted this comment as an indication that global risks have eased in the wake of the UK’s Brexit vote last month.
Since the last FOMC meeting on June 14-15 there has been a growing narrative that the Fed should have raised rates at least once earlier this year. If you recall, many Fedwatchers (including me) were convinced that the FOMC would raise the Fed Funds rate at the June meeting. However, prior to that meeting the Labor Department reported that only 38,000 new jobs were created in May (later revised down to only 11,000), which was a shocker given that the pre-report consensus was for 160,000 jobs. This paltry jobs report gave the Fed pause.
In retrospect, the Fed probably should have raised the Fed Funds rate at the June meeting because new job creation exploded higher in June with 287,000 new jobs reported. But that information was not known until the unemployment report was released on July 8. Since then we have seen more indications that the US economy is improving.
So the question is, why didn’t the FOMC raise the Fed Funds rate at the conclusion of yesterday’s meeting? My theory is and has been that the Fed will not raise the rate at a meeting when there is not a Janet Yellen press conference afterward, as was the case with this week’s meeting.
The next FOMC meeting will be on September 20-21 when there will be a Yellen press conference afterward. Speculation is rising that the long-awaited next hike in the Fed Funds rate will occur at that meeting. Others think it won’t happen until the December 13-14 meeting.
Our next clue on this timing matter will come with the minutes of this week’s FOMC meeting which will be released on August 17. That is when we will find out in detail what the FOMC members discussed at this week’s meeting. Those minutes could well reveal that the Fed is feeling much more confident about the economy and is thus ready to raise rates.
If that is the case, then the odds of a September rate hike could increase significantly. On the other hand, there are those who believe the Fed will not raise rates on September 21 because it’s too close to the presidential election. In any event, I will peruse the Fed minutes on August 17 and report back to you in this Blog on August 18.
If it is clear that the Fed is ready to hike in September, this could be negative for stocks as has been the case in the past. We could even see fears of a second rate hike at the December meeting. That remains to be seen. Again, I’ll keep you posted.
US Stocks at Record Highs While Others in Bear Market
Speaking of stocks, I ran across a very interesting chart earlier this week. This chart shows the performance of the S&P 500 (black line), the Japanese Nikkei Index (purple line), the Shanghai Composite Index (red line) and the Eurozone’s Stoxx 600 Index (green line). Take a look:
I include this chart only to point out again what myself and others have been saying about the US stock markets this month, that the S&P 500 and other major US indexes are now significantly over-valued. And after trading in lockstep with these foreign stock indexes for over a year, the S&P 500 is now the “Lone Ranger” as you can see in the chart above.
Two parting thoughts: First, according to the Stock Trader’s Almanac, August is the worst-performing month for broad stock market indexes (Dow, S&P 500, etc.) going back to 1988.
And second, a new survey from UBS Wealth Management of over 2,300 wealthy US investors found that 25% plan to take their money out of stocks ahead of the presidential election.
A correction from these levels could be painful.
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