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Portfolio > ETFs > Broad Market

What the Fed Will and Won't Do This Week

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Here is what is likely to emerge from the two-day meeting of the Federal Open Market Committee this week:

  1. Although they will refrain from any action on interest rate policy, central bankers will signal the possibility of a hike sometime this year, perhaps as early as their next meeting in the third week of September.
  2. Fed officials’ openness to raising interest rates later this year will primarily reflect their comfort with the health of the labor market, including several additional indications in recent weeks that the weak job creation numbers for May were indeed an outlier. Meanwhile, the assessment of inflation will remain essentially unchanged.
  3. Fed officials will be comforted by the extent to which financial markets have brushed off the surprise outcome of the Brexit referendum in the U.K. The response of investors may even have been too cavalier, given the considerable uncertainties around what could be protracted and messy negotiations between the U.K. and its European partners.
  4. The possibility of a 2016 rate hike also is increased by a less-positive input: the further recognition by Fed officials that structural headwinds are compounding the cyclical obstacles to U.S. “economic liftoff.”
  5. Nonetheless, the Fed’s openness to a rate hike will remain conditional, as officials point to some mixed elements of U.S. data and the overall uncertainties facing the global economy. Obviously, central bankers will also be aware that two important monthly job reports are scheduled before they gather again in September.
  6. Although the Fed will be very careful not to get embroiled in what is likely to be a noisy U.S. presidential election in November, global political and geopolitical uncertainties are likely to be part of the impetus for officials to retain considerable policy optionality at this point.

The most likely immediate market impact of all this will be some repricing of shorter-maturity U.S. Treasury securities, as traders and investors revise somewhat higher their expectations for the 2016-17 path of the Fed funds rate.

What happens more broadly in financial markets essentially depends on two other data points: whether this week’s set of corporate earnings also beats expectations; and more generally, how far financial markets remain focused on short-term corporate and central bank liquidity injections as opposed to the more gradual impact of tepid fundamentals.


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