All eyes are on yet another “most important ever” Federal Open Market Committee (FOMC) policy meeting. On Wednesday afternoon, policymakers will release their announcement (no hike expected), Federal Reserve Chairwoman Janet Yellen will hold her press conference (many words will be spoken, but little will be said), and economic and interest rate estimates will be updated.
Of all these developments, the latter will be the most consequential.
Currently, the futures market doesn’t believe the Fed will raise interest rates at all this year: December rate hike odds are at only 40%. But the Fed’s last forecast in March pointed to two rate hikes this year. Since then, steady labor market tightening has driven a majority of Fed policymakers to warn the market was being too pessimistic on the chances of two, three or even four rate hikes this year.
This difference of opinion will need to be reconciled. Whether stocks rise or fall on Wednesday will depend, in large part, on whether the FOMC meeting results in the Fed sticking to its guns on this or once again deferring to Wall Street … at the risk of further eroding its already thin credibility as being dependent on the economic data.
The stakes are high.
The Dow Jones Industrial Average has traded back below its 50-day moving average. We face the specter of a first-ever departure from the European Union, a massively contentious U.S. presidential election, crude oil back under $50 and U.S. 10-year yields back at 2012 lows.
German 10-year bunds traded with a negative yield for the first time ever on Wednesday. According to Fitch, the volume of global government bonds trading with negative yield has crossed the $10 trillion mark for the first time — representing about 20% of total. Precious metals have been soaring on safe-haven inflows.
Worries that the Federal Reserve will be pushed to raise rates in July or September is exacerbating this dynamic — on concerns this would be a policy mistake.
Yellen is sure to mention these concerns in her post-FOMC press conference today amid evidence of ongoing labor market tightening and building evidence of wage inflation. Yellen must walk a thin line between expressing confidence in the economy but not shocking liquidity-addicted markets. As time goes on, this becomes harder and harder to do.
Just look at Wednesday’s retail sales report: Headline sales rose 0.5% in May over April, beating consensus estimates, thanks to a solid rise in core sales (excluding autos, gasoline, food, and building materials). Overall, the Atlanta Fed’s GDPNow estimate of second quarter growth stands at 2.8% (vs. 2.5% previously).
For all these reasons, don’t expect anything new from Yellen and her cohorts: They’ll most likely mention downside risks, recent highlights in the economic data, and continue to pencil in two rate hikes.
With the Federal Reserve unlikely to do anything significant, stocks are likely to be disappointed since investors will be left with all the issues that have been bothering them lately spiked by the realization that the Fed could be turning hawkish.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
