Investors are nervous, and stock markets appear to be on alert in the lead up to the U.S. Federal Reserve’s next decision on interest rates Nov. 1.
While the central bank isn’t expected to raise rates, analysts, economists, and investors will be parsing the language associated with the Fed’s decision for any signs of the future direction of monetary policy. The comments from Fed Chair Jerome Powell will also be carefully dissected for any hints as to where interest rates are headed from here.
As is typically the case, investors and traders can be expected to overreact to the Fed’s decision. Thus, the meeting will likely add more volatility to an already difficult stock market.
Another Hawkish Hold on Interest Rates
Futures traders have priced in a 0% chance that the Fed will announce an interest rate increase on Nov. 1. The probability of a rate hike fell to zero after the latest reading showed that inflation in the U.S. declined to 3.7% in September of this year, its lowest level since May 2021. The Fed Funds Rate is now sitting in a range of 5.25% to 5.5%, its highest level in 22 years, and the most restrictive monetary policy seen in America since 2007.
Markets also see little chance that the Fed lifts rates higher at its last meeting of the year on Dec. 13. At this point, investors and traders aren’t concerned about interest rates moving higher. They’re looking for clues as to when the central bank will start lowering interest rates. Those clues, if there are any, will likely come in the language the Fed uses in announcing its latest pause on interest rates, as well as in the comments Fed Chair Powell makes when speaking to the media.
Economists and analysts generally expect Powell to deliver another “hawkish hold,” which means the Fed will hold off on any changes to interest rates while continuing to talk tough about the need to slow the U.S. economy and bring inflation back down to its 2% annualized target. This has been the central bank’s approach coming out of its last few policy meetings.
Market Fits
Investors should be prepared for the stock market to have a fit if Powell’s comments, or the Fed’s language, is more aggressive than expected. The last time Powell spoke publicly, at a speech to the Economic Club of New York earlier in October, U.S. bond yields spiked to 5% and stocks closed deep in the red. Powell said inflation is still too high and slower economic growth is needed to bring down elevated consumer prices.
These comments led Wall Street to assume that interest rates will remain higher for longer. That is to say, the Fed is likely to keep interest rates at their current levels well into next year. Futures traders had previously expected a rate cut as soon as March 2024. Now, the betting line is that the first rate decrease won’t occur until next summer, at the earliest.
Any language from the Fed or Powell that pushes back the date of the first rate cut further and stocks can be expected to nose dive on Nov. 1. Conversely, a softening of the language from the central bank is likely to send stocks higher.
What’s Next
The decline in equities that began in August has continued in October, with all the major U.S. indices on track to post declines this month. Much of the pullback has been due to rising bond yields and expectations surrounding the future direction of interest rates. As such, markets can be expected to be on edge in the coming days as we get closer to the latest interest rate announcement from the Fed. Investors should expect more volatility as we near the Nov. 1 decision.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
