How the Fed Is Managing This Market

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How the Fed Is Managing This Market

Daniel Cross Mar 10, 2016

What Is the Fed thinking Now?

However, inflation data in January showed a sharp spike to 1.4% – much closer to the 2% threshold the Fed had been waiting for and a good sign that inflation was picking up as originally anticipated. The National Association for Business Economics (NABE) revealed that 80% of economists believe that there will be another Fed interest rate hike this year, but investors are more skeptical given the Fed’s recent track record of inconsistency and an overall malaise in the global economy.

The continued weakness in global commodity prices is alarming as well. Commodities tend to do well when inflation rises, but with oil at multiyear lows and bumper crops in soft commodities keeping prices low, it doesn’t seem to be pointing to an inflation recovery.

One indicator investors are keeping an eye on is CME group’s FedWatch tool which predicts the possibility of a Fed rate hike. December looks like the most likely candidate right now with an estimated 70% hike to 0.50%. The possibility increases every month beginning with an 18% likelihood in April.

Another hike in December makes the most sense. It gives the economy plenty of time to build up inflation while keeping to the Fed’s goal of slowly raising rates to avoid startling the markets and keep the increase gradual and consistent.

The Bottom Line

Once these three key indicators align, we should see more confident and accurate statements from the Fed regarding another rate hike. One thing that’s still unclear is how long the rate hike talk will go on and how many increases we’ll see before the Fed officially announces that it has reached its goal. The original 12-month timeline for completing the process is looking like it could be extended by at least twice that time.

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