The Federal Reserve has typically been more reactive than proactive. Historically this has related to economic readings whereas now it relates to how stock and bond markets are behaving. In regards to the stock market, it’s no coincidence that the Federal Reserve has been more hawkish when the S&P 500 moves higher and more dovish when it moves lower. You can essentially predict the next announcement with almost pinpoint accuracy, which could provide valuable information as to how the market will behave in reaction to that announcement. This, by the way, is what’s causing so much volatility in the market.
So what happens in late April the next time Federal Open Market Committee (FOMC) meets? Before answering that question, we need to look at all the details. (For more, see: How Federal Open Market Committee Meetings Drive Rates And Stocks.)
There were always dissenters within the FOMC, but the hawkish rebellion is building momentum. Federal Reserve Vice Chair Stanley Fischer and Cleveland Fed President Loretta Mester are hawkish and that list is quickly growing. It now includes the following: (For more, see: How Interest Rates Affect the U.S. Markets.)
- Patrick Harker, President of the Philadelphia Fed
- John Williams, President of the San Francisco Fed
- Esther George, President of the Kansas City Fed
- Dennis Lockhart, President of the Atlanta Fed
George wanted a 25 basis point hike at the last meeting and all the others want the Federal Reserve to consider a rate hike in April. Federal Reserve Chair Janet Yellen has cited risks from abroad as one reason not to move too fast, despite a strong domestic labor market. This is interesting in itself because it indicates that the Fed is moving away from its dual mandate of full employment and 2% inflation. (For more, see: Breaking Down the Federal Reserve's Dual Mandate.)
As far as the dissenters are concerned, they are opposed to the dovish stance and are likely more concerned with the long-term health of the economy than how assets perform in the near term. If the Fed’s actions were effective for the actual economy, then it wouldn’t have remained dovish for more than six years. This has been a prolonged period of highly accommodative monetary policy. It has created overleveraged situations for many corporations and consumers. The majority of those corporations lack top-line growth.
Millions of investors have done well over the past six years. This is the positive end impact of prolonged record-low interest rates. But have more people been harmed than helped, including workers who have been laid off because corporations don’t see demand and are allocating more capital to dividends and buybacks as opposed to growth? (For more, see: 7 Misconceptions About the Federal Reserve.)
The Bottom Line
The Fed Reserve did hike rates in December but opted not to in March. Currently, there is definitely hawkish momentum building within the FOMC which increases the odds of a rate hike in April. However, there will likely be no rate hike in April if the stock and bond markets perform poorly between now and then. Instead of looking at full employment and inflation, just watch how the markets perform. If they perform well, don’t be shocked if there is a rate hike in April. Actually, it would be likely. If the markets perform poorly, the Federal Reserve will stand still and deliver optimistic language to soothe concerns. The one situation that’s difficult to predict is if there’s a sideways market between now and the April meeting. In this instance, it’s anyone’s guess. (For more, see: Will the Fed Hike Rates as Soon as June?)