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FOMC Preview
The Federal Open Market Committee meeting will be held Tuesday, August 5. The surprise factor ahead of the meeting is high.
As of this posting, the fed funds futures market shows an implied probability of 92% that the FOMC will hold the fed funds rate steady at 2.00%. Accordingly, a decision to move the fed funds rate up, or down, would be a huge surprise that would prompt an outsized response.
The market's handicapping of this FOMC meeting, however, is correct in our estimation.
With inflation pressures evident but the economy and financial markets still unsettled, the FOMC isn't going to make a move at this juncture.
The expected inaction doesn't mean the market won't be interested in the meeting's outcome. On the contrary, interest will be as high as ever because of the uncertainty surrounding the wording of the policy directive.
Our sense of things is that the directive will communicate the overriding message that the Fed is going to remain in a wait-and-see mode as it aims to assess further incoming data on inflation and economic activity, and continues to monitor the functioning of the financial markets.
Reading between the lines, though, we think there is increased potential that the market will perceive a comforting message that the Fed won't be hiking interest rates anytime soon.
Although recent inflation reports have shown consumer inflation on the cusp of being unacceptable, and should all but ensure a dissenting vote from Dallas Fed President Fisher and perhaps Philadelphia Fed President Plosser as well, the FOMC will recognize that the recent drop in commodity prices, signs of further deterioration in the labor market, the depressed state of the housing sector, and evidence pointing to a slowing global economy have afforded it some added time when contemplating the timing of an interest rate hike.
Throw in the understanding, too, that the presidential election is drawing closer and a rate hike in the near-term seems highly unlikely.
This dovish perspective should be supportive for the stock market since it has been caught up with recent (and trailing) inflation data and has been unnerved by the idea that the FOMC will raise rates sooner rather than later.
Feeds!