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Fed Rate Hike Is Too Close To Call

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Fed Rate Hike Is Too Close To Call by Amey Stone, Barron’s

H/T MacroDigest

In an ideal world, there would be a pretty clear consensus ahead of a Federal Open Market Committee meeting about what policymakers were likely to decide. If a rate hike was imminent, Fed officials would have signaled it, the bond market would have priced it in, and markets would remain calm when it was announced.

None of those things are likely to happen this time around. The FOMC meets Wednesday and Thursday and there is no clear consensus on Wall Street about whether it will raise rates. Fed officials have been mixed in their comments, and market strategists have been all over the map about what they think is best.

In a Friday Bloomberg commentary, Mohamed El-Erian, chief economic adviser at Allianz SE, put odds against a hike at an almost absurd 51-49. “It is that close for the September policy meeting,” he wrote.

Only the bond market has been unequivocal: It doesn’t want or expect a rate hike. Traders have kept rates low at the short end of the yield curve. Fed-funds futures signal a less than 30% chance of a September move. The reigning bond king, DoubleLine Capital’s Jeffrey Gundlach, invoked The Rocky Horror Picture Show when he said recently, “Dammit Janet, don’t raise rates,” while pointing to a host of reasons for waiting—slowing China, crashing commodities, scant inflation, to name just a few.

What happens if the Fed does hike rates for the first time in nine years? After all, a 25% chance is still pretty decent odds, notes Anthony Valeri, an investment strategist with LPL Financial.

Markets could get ugly fast. Rates at the short end would rise sharply, and riskier assets—junk bonds and investment-grade corporate bonds—would get hit, and stocks, too. There’s a chance longer term Treasuries might hold up better since they are priced off inflation expectations, which would tumble. However, yields are already low, so don’t bet on it. “There would be few places to hide,” Valeri says.

See full article here.

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