The Federal Reserve’s policy committee is meeting Tuesday and Wednesday. But let’s not talk about that.
Instead, let’s jump ahead to the December meeting where there is still a chance — albeit a small one — that interest rates won’t go up.
As of last Friday, Wall Street thinks there was a 72.3 percent probability of a 25 basis point (one quarter of 1 %) rate hike when the Fed’s Open Market Committee meets on Dec. 18-19 — and a 3.6 % chance of a 50-basis point (one half of one %) hike.
That leaves a 24.1 % chance there will be no December increment.
Up until recent strong economic reports, the feeling has been that there was a 50/50 chance of a December rate hike. But with economic data showing vigor — and the Fed honed in on inflation, given how much our deficit-addicted government spends — those odds have gone up in recent weeks.
A hike in rates at this week’s meeting is basically a foregone conclusion, the market thinks.
The odds makers on Wall Street say there’s a 97.9 % chance of a 25 basis point hike this week and a 2 % chance of a 50 basis point increment.
You can fit the no-rate-hike crowd in the back seat of a Prius.
The Fed last hiked rates in June — to between 1.75 and 2 percent — the most recent in a series of seven hikes that started in 2015.
Unless something extraordinary happens at the Fed meeting this week, the new rate should be set at 2.0-to-2.25 %.
The Fed should also give its typical assessment of the economy in the post-meeting summary: growth strong, job market tightening and inflation still nothing to get worried about.
The Fed doesn’t set rates for the financial markets, but its actions influence them. The US government’s 10-year note is now solidly over 3 %, which is their highest level since May, and it seems to be staying there.
Pretty soon you’ll be hearing talk about the probability of 4 % rates on the 10-year, especially if the Fed this week is more optimistic about the economy than expected.
And while the guessing is that the Fed will soon slow down its rate increments, the experts still think that two more hikes will come in 2019.
Where can there be surprises?
If the Fed wants to get the financial markets’ attention, Chairman Jerome Powell could raise rates by 50 basis points on one or more occasions. Powell might also decide to raise rates in between its normal meetings — there’s no rule that says the Fed can’t, and it has done that before.
Another surprise could arrive from the stock market, which is percolating again into dangerous territory.
Typically investors “don’t fight the Fed” — meaning, you don’t drive stock prices to new records when interest rates are being raised. Those higher rates eventually compete against stocks because the yields people get on government securities come with no risk.
Until Monday, stocks were strangely ignoring the ongoing chaos in Washington and — probability most important — the trade war between the US and China.
And news that China broke off negotiations over this past weekend could further rile stocks.
The Dow Jones industrial average did slip on Monday, falling 181.45 points, to 26,562.05.
Wall Street rallied nicely last week, and those gains in stocks were attributed by some media pundits to an easing of the trade wars.
Nonsense! Who makes up this crap?
Tensions with China over trade couldn’t be worse right now, and they were just as bad last week. Stocks went up because it was one of those notorious options expiration weeks when traders typically push stock prices and equity futures prices up because they want to roll their portfolios over into the new month.
In other words, last week’s action was a technical rally. And technical rallies are often wiped out when fundamentals — like the trade tension and the Fed’s actions — become overwhelming.