Fed Rate Hike: How Will Markets React?

The week we have all been waiting for is upon us. As we look forward to this week’s big Fed meeting and the near-certainty of a Fed rate hike (the second this year), the question on everyone’s mind is: How will markets react?

Markets are at all time highs and with broad sector rallies constantly occurring, it appears there is not a weak spot to be found. In reality, some areas of the market have stalled out and retreated. However, many bears have started to capitulate, and while this is more a process than an event, we must continue to be aware of the bogey man that could halt this tremendous rally. That bogey man may well be the Federal Reserve Open Market Committee.

Some believe the Fed will send a rather hawkish message, including overtones of more rate hikes to come in the year ahead. While additional rate hikes will eventually happen, timing is certainly key. That timing makes the Fed extremely relevant to market action, even if the election is given credit for this remarkable rally. (Side note: President-elect Trump was heard taking credit for the market rally on December 9.)

So why should we be nervous about the Fed when the stock market is sending the message that everything is “okay?” Well, we should certainly respect the data as it comes in – that is what the Fed will be watching. If inflation starts coming in hot, they are more likely to be aggressive.

Now, as it relates to forecasts, the ones being issued by Fed committee members are some of the worst we have ever seen. Trying to game trading off forecasts for rate hikes in the year to come is useless. We will be listening very carefully to the content and the tone of their comments during this week’s meeting.

Let’s also understand that in a world of Fed rate hikes, we’ll reach a point where it’s not good for the stock market. Further, if the bond market does not react similarly, then we’re looking at a potentially dangerous situation – rising inflation and lower growth.

For now, the stock market is trying to tell a different and much more positive picture. If the Fed is lucky, they may be able to detach themselves here. The time for a Fed rate hike is right and the opportunity is now, but it may take some time before we get back to “normal.”