Rally in Stocks Takes Heat Off Fed, Now They Talk Rate Hikes Again, Market Expectation of a Rate Hike Spikes

Rally in Stocks Takes Heat Off Fed, Now They Talk Rate Hikes Again, Market Expectation of a Rate Hike Spikes by Wolf Richter – Wolf Street

But all bets are off if something big breaks.

Since the low point on Christmas Eve, the S&P 500 has rallied 9.9%, nearly half of which on December 26. This was helped along by the word “patient,” used by Fed Chairman Jerome Powell, other Fed governors, and the FOMC minutes. The effect: Wall Street has stopped haranguing the Fed about the rate hikes and the QE unwind, and the White House has stopped leaking titillating tidbits about President Trump wanting to fire Powell. The dust is settling.

And now the Fed governors are fanning out to talk about rate hikes again, adding the soothing terms as “patience” or “wait,” and disagreeing with each other, as they usually do in public to keep the debate going on how many rate hikes will eventually happen.

In early 2018, the markets expected two rate hikes for that year. Fed governors gave speeches throughout the year that gradually removed the disagreement over how many rate hikes, and in the end, they voted unanimously for four.

When it comes to rake hikes that are more than a couple of months away, the market’s expectations are way off. Markets don’t want rate hikes and bet against them until the rate hikes move closer into view, then gradually they climb on board.

Market expectations or a rate hike suddenly spike.

At the beginning of January, markets put a 2.5% chance – in essence nil – for one rate hike by the end of 2019. But over the past three days, this probability spiked to 27.6% by this morning and tapered off some during the day (chart via Investing.com, based on 30-Day Fed Fund futures prices).

In the dot-plot at the December meeting, FOMC members had a wide-ranging view of how many rate hikes they saw in 2019, but the median projection was for two rate hikes.

The new twist: the words “patient” and “wait” are cropping up everywhere. There’s now a consensus that the dust would need to settle and markets would need to get used to current monetary policy, which would still need to work its way into the financial markets and tighten financial conditions further, which will take time, before the next steps will be taken.

So four Fed governors communicated with the public about rates today. One thing they agreed on is the strength of the US economy in 2018; and they expect solid but slightly less growth in 2019. Here are a few things that these appearances have confirmed:

  • Fed governors are successfully talking up the markets – such as in Boston Fed President Rosengren’s comment that financial market sentiment “may have become unduly pessimistic.”
  • As they succeed in talking up the markets, heat comes off the Fed, and it can pursue monetary policy without the White House breathing down its neck.
  • The consensus at the Fed emerged that “patient” is the new key word. This seems to apply only to the first half of 2019.
  • Rate hikes are not off the table. As the second half approaches, they’ll be put back on the front burner.

So here we go.

Atlanta Fed President Raphael Bostic, a voting member on the FOMC this year, used the word “patient” three times in his speech today. Then he vaguely laid the groundwork for a possible quarter-point hike to bring policy, which has now “come close to achieving a neutral policy stance” to an actual neutral stance, but for now sees no reason to take it beyond neutral.

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Wolf Richter

In his cynical, tongue-in-cheek manner, he muses on WOLF STREET about economic, business, and financial issues, Wall Street shenanigans, complex entanglements, and other things, debacles, and opportunities that catch his eye in the US, Europe, Japan, and occasionally China. WOLF STREET is the successor to his first platform… TP-Title-7-small-200px …whose ghastly name he finally abandoned in July 2014. Here’s the story on that. Wolf lives in San Francisco. He has over twenty years of C-level operations experience, including turnarounds and a VC-funded startup. He earned his BA and MBA in Texas and his MA in Oklahoma, worked in both states for years, including a decade as General Manager and COO of a large Ford dealership and its subsidiaries. But one day, he quit and went to France for seven weeks to open himself up to new possibilities, which degenerated into a life-altering three-year journey across 100 countries on all continents, much of it overland. And it almost swallowed him up.