Yet again, despite another massively hyped Federal Reserve policy making event, Thursday’s “hike or no hike” decision went as the futures market had expected — no hike.
Moreover, it was a dovish pass: The Summary of Economic Projections revealed that at the median, Fed officials now only expect a single rate hike by the end of this year. The futures market is now pricing in a 49% chance of a hike at the December meeting (although Fed chairman Janet Yellen threatened that the October meeting was “live” and could result in a hike should markets and economic data improve).
But the kicker — the one that pushed large-cap stocks lower into the closing bell — was the first-ever appearance of a negative interest rate projection on the SEP by a Fed policy maker. Someone, it seems, expects federal funds policy rate to be in negative territory at the end of 2016.
Not only does this undermine confidence in the state of the economy, but it calls into question the efficacy of the Fed’s ultra-easy monetary policy stance that has been in place, to varying degrees, since 2008.
As a result, the Dow Jones Industrial Average lost 0.4%, the S&P 500 Index lost 0.3%, the Nasdaq Composite gained 0.1% and the Russell 2000 gained 0.5%.
The action in the currency and commodities market was as expected, with the falling dollar helping gold gain 0.8%. Treasury bonds rallied as yields fell, pushing down financial stocks to the worst performance of the day — down 1.3% as a group. Defensive utility stocks were in the vanguard, rising 1.3%.
The action in precious metals boosted the group of mining stocks recommended to Edge subscribers to a gain of 2.2% led by a 5% rise in Kinross Gold (NYSE:KGC). With the Fed holding fire on rate hikes (and apparently warming up to the idea more aggressive stimulus measures may be needed soon) gold and silver could both see a nice run here.
Until higher inflation becomes a clear and present problem, this continual moving of the goalpost for Fed rate hikes — deferring until more data comes in — looks set to continue. In her post-announcement press conference, Yellen admitted that they were “way below” their inflation target.
In its statement, the Fed fingered recent global economic weakness and financial market turbulence as reason to believe that inflation would take longer to return to its 2% target. The SEP “dot plot” shows the median rate for the end of 2015 falling to 0.38% from 0.63% in June, to 1.38% for 2016 vs. 1.63% in June and 2.63% for 2017 from 2.9% in June. The long-term neutral rate declined to 3.5% from 3.8%, signifying ongoing structural problems in the economy holding down its potential growth rate.
In corporate news, Oracle (NYSE:ORCL) fell 4% after reporting weaker-than-expected fiscal first-quarter revenue on currency headwinds. Underwear maker Hanesbrands (NYSE:HBI) gained 2.1% after being upgraded by analysts at Goldman Sachs, thanks to increased pricing power and a strong balance sheet.
Moving forward, it will be critical for the bulls to recover from Thursday’s intraday selloff. The day’s action resulted in a very negative “shooting star” pattern that signals buying exhaustion and often precedes pullbacks. While the Wall Street stimulus junkies should’ve been happy with the continuation of near-0% interest rates, there is now a nagging fear that credibility in central bankers is being lost — something that RBS’ Alberto Gallo took to Twitter this afternoon to reiterate.
It’s also worth noting that the December Fed policy meeting will come in the context of another likely budget showdown in Washington over the debt ceiling.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
