Calm Before the Storm? Look for Fed Rate Indicators


When you look at today’s American stock market, you don’t really see much of note – at least not on the surface. The major indices are holding pretty steady. The market is not on a wild ride up or down.

However, some investors don’t expect this to last, as they’re looking beyond the surface to some of the underlying issues that give traders the jitters.

First and foremost, we have the discussion about federal interest rate hikes. When are they going to occur? What drives them? What effect are they going to have on the economy?

We’ve reported on how Jerome Powell, the Fed chair, has been calming down investors, pundits and White House officials by suggesting that the Fed isn’t going to raise interest rates anytime soon.

However, some analysts are taking more of a data-driven approach in predicting what’s going to happen with interest rates. We like to see predictions in the context of raw numbers, and some of the experts bringing that analysis right now are saying we might see a rate hikes sooner rather than later, with all of the market volatility that may entail.

“The time between the Fed’s final interest rate hike and its first rate cut in the past five cycles has averaged just 6.6 months,” writes CNBC’s Patti Domm yesterday, citing data from Natixis economist Joseph LaVorgna.

Experts note that the bond market has already priced in a Federal Reserve interest rate cut this year, which goes against all of those public assurances that rates are not going up.

However, others today are pointing to a meeting by the Federal Open Market Committee that indicates there may be no Fed rate raises at all this year – a recent SeekingAlpha post suggested this on the FOMC:

“Last week’s meeting of the Federal Open Market Committee (FOMC) surprised even those who expected a dovish outcome. As the Fed wrangles with its policy framework, one takeaway is clear: don’t expect rate hikes this year – and possibly next.”

The piece breaks down an inflation pattern that doesn’t seem to account for everything going on in today’s market:

“As we see it, several FOMC members, including most of the influential monetary policy thinkers, worry that inflation and inflation expectations are simply too low…The logic is simple: The Fed wants to keep inflation averaging 2% across the business cycle. And inflation typically runs well below 2% in bad economic environments. If that’s the case, the Fed must target inflation rates higher than 2% in good economic environments to keep the average at 2%. The Fed hasn’t really done this. Using the committee’s preferred price index, inflation has averaged a meager 1.3% over the past five years and 1.4% over the past 10 years. That’s a lot of “missing” inflation.”

Keep an eye on what people are saying about the Fed, but pay even closer attention to the data – because the signal in the noise is likely to give investors a heads-up before a new rate cut rocks the boat.