All eyes will be on the big Fed meeting this week when they will possibly announce a new monetary policy. We all know that we are much closer to a rate hike cycle than we have been in quite some time. However, let’s not assume the Fed will just raise rates for a symbolic reason. If they do not see inflation expectations rising, then they won’t make any changes – period!
I have spent a lot of time lately talking about the Fed Funds Futures. It’s a great indicator, as it tells us what the market expects in terms of policy. A lot of people ignore these futures prices, which is a big mistake. After all, the Committee believes in free markets, and therefore they respect price, supply and demand.
Maybe people are complacent. For the better part of five years, I had little interest in following the futures. Once the Fed enacted ZIRP (zero interest rate policy), we just had to sit and wait. Former Chair Bernanke erred on the side of conservatism and Chair Yellen does, too. She will wait as long as possible to raise rates until two objectives are met: price stability and full employment, their two mandates from Congress.
When you take a look at the Fed Funds Futures chart, the market indicates a 25bps rate hike coming by December, and a second rate hike by April 2016. Perhaps a smaller hike could come by September, around 10bps (which is fully priced in).
So about The Fed’s meeting. This two-day meeting will be followed by a press conference led by Chair Yellen. We will listen closely to the language she uses in her statement and pay attention to any revisions of economic projections for the remainder of 2015 and beyond. If you recall, the March revisions downgraded the economy and inflation. Recent job gains may offset other weakness, but I suspect the Fed will start taking a more guarded approach while raising the rhetoric around their belief in a better second half of 2015.
