Just last month, the Fed hiked interest rates for the first time in almost a decade and told the public that it would gradually raise rates—four hikes were supposedly in the cards for 2016.
Today, the Fed meets again and many are hoping Yellen & Co., will deliver a dovish message. Some are even agitating for more bond buying.
Could the Fed really change its mind on the outlook for the economy after just six weeks? You betcha. I give you exhibit A and exhibit B below.
The Fed claims that its monetary policy is data dependent, but by data they really mean the level of stock prices, and not just any stocks prices. In the Fed’s mind, there is a certain group of stocks that are more important than all the others. That group would be bank stocks. As our chart shows, bank stock performance has been even more dismal than the performance of the broader market.
Exhibit B is the spread on high-yield bonds. To start the year, high-yield bond spreads have blown out to new highs. The Fed is unlikely to be thrilled that credit conditions for corporations have continued to tighten.
What will Yellen & Co. do about falling bank stocks and more expensive borrowing costs for companies? Don’t expect a complete about face, but the Fed is likely to nod toward the volatility in the markets and hint that the pace of tightening will be slower than was outlined a few weeks ago.
Jeremy Jones, CFA
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