All Eyes On The Fed (Part 1)

•  The US Federal Reserve’s FOMC (Federal Open Market Committee) is meeting for 2 days which began yesterday.

•   Financial market participants will be keenly awaiting Today’s press release (at 2:15pm) for signs of clues for when the Fed will begin to start “normalizing” interest rates.

•     The US Yield Curve is suggesting that the bond market is pricing in a September increase in the Fed Funds rate by .25%.

(click on the chart to enlarge)   

• Some analysts are suggesting it could happen as early as June, some think that it may not happen until 2016. 
• The latter group are focusing on the strength of the $US and the inherent monetary policy “tightening” that has caused more recent US economic data to come in at levels well below expectations.
•  The word that all will be watching for in the Fed’s release will be “patient”. 
• In previous statements the Fed has continued to stress that is prepared to be patient in its assessment of the current economic environment and in its desire to start raising interest rates. 
• Global deflationary pressures have allowed the Fed this option as while one of its 2 mandates, the employment picture, continues to strengthen, the other, inflation, has been declining.
•  Some fear that low interest rates have inflated asset (stock and bond) prices and that even marginal increases in interest rates will have a significantly negative impact on them which will increase volatility.
•  Central Banks loathe volatility (and the uncertainty erodes confidence in financial markets) and accordingly the Fed wants to try to negotiate interest increases in as smooth a manner as possible to avoid any serious market disruption. 
• This is the Fed’s dilemma and market participants will be watching closely, perhaps too closely for any signals of the Fed’s next moves.
•  Stay tuned, analysis of the Fed’s press release (Part 2) tomorrow.

The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.