In a world that has become increasingly dependent on the actions of central banks, it should come as no surprise that investors from Wall Street to London are nervously waiting to see what the Federal Open Market Committee is going to do to the federal funds rate at its September meeting.
Policy “doves” — those who believe the Federal Reserve should maintain an easy monetary policy — fear that if FOMC raises rates, it will put undue pressure on a U.S. economy that is already struggling with lackluster wage growth and a widening trade gap. On the other hand, policy “hawks” — those who believe the Fed should enforce a tighter monetary policy — fear that if the FOMC doesn’t raise rates, it won’t have the capacity to stimulate the economy in the future should the need arise.
Most analysts believe that FOMC is going to raise rates. In fact, according to Bloomberg’s most recent survey, 76% believe that it will raise rates in September.
However, that sentiment may be shifting.
‘Bad News is Good News’
For the past few years, traders on Wall Street have bought stocks with abandon with the confidence that the Fed was going to continue propping up the U.S. economy and the U.S. stock market by keeping interest rates low and engaging in various quantitative-easing (QE) programs. They believed this because everyone had bought into the idea that “bad news is good news.”
The idea was that the worse the economic news coming out of the U.S. got, the more pressure would be applied to the Fed to try and stimulate the economy — thus pumping billions of dollars into the financial markets to boost borrowing and investment — which is good news for investors.
As we approach the September FOMC meeting, we are starting to see a decline in economic data. Just this week, the ADP report showed that the number of non-farm jobs created in July slipped below 200,000, and the Bureau of Economic Analysis report showed that the trade gap has widened to $43.8 billion — thanks in large part to the strengthening U.S. dollar, which is boosting imports and limiting exports.
These concerning economic data points are causing some analysts and investors to wonder if the FOMC will hold off on raising interest rates. After all, in statement after statement, Fed Chair Janet Yellen has insisted that the FOMC will be watching economic data and will base its decision on whether to raise interest rates on the strength of that data.
All eyes are now squarely focused on Friday’s non-farm payrolls number. If the Bureau of Labor Statistics reports numbers as weak as those from ADP, it will most likely add more fuel to the “bad news is good news” fire and send stocks higher on the hopes that the FOMC is going to hold off on raising interest rates — for now.
If this happens at the same time that the Chinese and European economies start to show some signs of recovery, all the better. The perfect blend in the eyes of most investors is an easy monetary policy in the U.S. with strong economic growth abroad. We’re still a long way away from that, but a strong Caixin Services Purchasing Managers’ Index number out of China and better-than-expected earnings in Europe this quarter are starting to point us in the right direction.
Dovish statements from the Bank of England and the Bank of Japan this week as they make their respective monetary policy statements could also go a long way toward soothing investor concerns of a global economic slowdown.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next SlingShot Trader trade and get 1 free month today by clicking here.
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