The FOMC’s meeting on March 16th and Chair Yellen’s comments resulted in some interesting insight into the future of policy normalization and the more recent focus on global risk. Prior to this meeting, the expectation was for the FOMC to raise rates four times in 2016 on its gradual path to normalization. However, the FOMC decided to leave rates unchanged as “global economic and financial developments continue to pose risks”.
As of right now, the most likely rate increase could occur in December 2016 with the market pricing in just a 51.5% probability. Therefore, the plan devised by the FOMC just four months prior has been quartered, with an increasing likelihood that there will be zero rate hikes this year. Are global risks so severe that they completely dismantled the FOMC’s plans after just three months following the first rate hike in nine years? Or is it because the March meeting came on the heels of further central bank accommodation by the BOJ (Bank of Japan) and the ECB (European Central Bank) and the worst start for the stock market in history? On top of that, the recently revised figures from the Atlanta Fed’s GDP Now estimate first quarter 2016 GDP of 0.1% down from over 2.0%!
Adding further speculation to future policy decisions, the FOMC announced on Thursday an emergency meeting to be held on Monday under expedited procedures.
As noted by ZeroHedge here, the last time a meeting like this occurred on November 21st, the FOMC voted to raise rates one month later.
Late Sunday night, an impromptu meeting at the White House was announced for after Monday’s expedited procedures meeting. This caught many Fed watchers off guard. President Obama, Vice President Joe Biden and Chair Yellen were to be in attendance, however the topic of the meeting was not disclosed.
After the meeting, the following statement was released by the White House:
“The President and Chair Yellen met this afternoon in the Oval Office as part of an ongoing dialogue on the state of the economy. They discussed both the near and long-term growth outlook, the state of the labor market, inequality, and potential risks to the economy, both in the United States and globally. They also discussed the significant progress that has been made through the continued implementation of Wall Street Reform to strengthen our financial system and protect consumers.”
Why is it so important to pay attention to FOMC policy decisions? Does an investor really have to consider how they should invest their retirement money based upon whether the Federal Reserve is going to affect the interest rate charged to banks? The short answer is yes. The longer answer is a bit more involved, especially during these unprecedented times of zero percent interest rates. Below is an interesting chart that may help shed some light on this unusual time in history.
Perhaps because Fed policy has shaped the entire stock market gain the past 18 years. This Ned Davis Research chart shows that the actual S&P 500 price since mid-1997 (red line) is double the S&P 500 price if we exclude 300 Fed meeting days (blue line) [150 meetings, so exclude 300 trading days including the day of and the day before of 4,708 total trading days since 6/30/97].
Source: Barry B. Bannister, CFA Stifel Equity Strategy bbbannister@stifel.com
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