Your Financial Future: Analysts watching as FED meeting approaches
All indications seem to point to an interest rate hike when the Fed, the central bank of the United States, meets on March 14 and 15.
Stock analysts study every word in the Fed’s minutes trying to predict what will happen. They try to gauge if the vocabulary is stronger from the previous meeting notes.
The Fed has said they expect three increases this year. Last year they warned of the possibility of four, but we only had one of a quarter point. We had a quarter point increase this January. It is highly believed that they will only raise rates at a meeting where they have a press conference scheduled afterwards. March is one of only about four opportunities for this to happen.
The Fed has been waiting for two things to happen before raising rates. They wanted to see the unemployment rate go down and see an increase in inflation. These things indicate the speed that the economy is growing. Both of these events are currently happening. They wanted inflation to be about 2 percent. When annualized, the most recent figures were about 2.5 percent. The biggest increase came in energy cost.
The government likes to see slow inflation. There were concerns the last several years that we could see deflation. During deflation, prices go down. Why would that not be a good thing? People would not buy anything that they absolutely did not need because they would believe that it would be cheaper later on. Since two-thirds of our economy is consumer purchases, companies would have to lay off employees to control cost. This would cause the economy to slow. The government also likes moderate inflation because it makes it less expensive for it to pay back national debt.
Fed Chair Janet Yellen is concerned because of the uncertainty of the Trump Administration. The stock market has been rallying because of the prospect of lower taxes and less regulations. Both of these things should boost company profits. A tax cut for consumers would give them more purchasing power. This could lead to increased spending and a growing economy. We also have fiscal stimulus from possible infrastructure projects on the horizon. What has not been priced into the markets is a possible trade war if we start redoing treaties and imposing tariffs on foreign imports. Other countries will start to retaliate and hurt our exports.
The Fed is concerned how this will all play out. While many Fed members feel it is time, the stock market has heard them cry wolf before and not follow through with hikes. Market expectations are currently low for an increase at March’s meeting currently priced into the market at about a 1-in-5 chance. The market believes the months of June, November and December are more likely.
When interest rates rise to a more normal level that will be negative for the stock market. Investors will have more choices where to invest their assets. Since the stock market is a giant auction, less demand will put pressure on total market capitalization. Remember, bond values go down as interest rates rise. The double whammy for the stock market would be if the Fed both raised rates and started to reduce the bonds bought during quantitative easing to clear their balance sheet. They have given no indication yet of adjusting their balance sheet.
Make sure that your asset allocation match this new period of time. What has worked the last few years may not be as successful going forward.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.