When will the Fed hike rates

Just can’t shake that feeling. Stocks were unable to hold onto early dip buying gains as jitters remain from Evergrande’s epic shortcomings.  Housing numbers reflected a massive comeback in August signaling that the homebuilding industry is still hot.

N O T E W O R T H Y

Spotty future.  Do you want to know what the Federal Reserve is going to do next?  Of course you do.  You and just about every living person who owns stocks, bonds, a home, a car, a boat, a plane… OK, OK you got the picture.  The relationship between interest rates and economic growth is not esoteric, but in fact, quite real.  Imagine all of the folks out there who are carrying credit card debit balances.  Those, in case you didn’t know, are most often variable and will rise along with bank rates and yields.  That means either their monthly minimum payments will go up, or the length of time it will take to pay down their balances will be extended.  Obviously, higher rates and yields will make borrowing for an already-pricey home more challenging by increasing already-high monthly payments. Same story for financing/leasing boats, cars, RV’s, or virtually anything that people purchase with some sort of credit. Companies, virtually all of them, utilize credit to finance liabilities in addition to tapping debt markets for capital raising.  Higher rates and yields make that critical borrowing more costly, eating into profits.  Lower profits for public companies mean potentially lower stock prices.  If you own bonds and you are planning to sell them before they mature, higher yields mean that your bond prices will be going down.  There is a hidden benefit for investors wishing to buy bonds.  For those investors, yields will be higher.  Bond investors will be pleased, and so would banks and brokerage firms who make money by lending money.  For the most part though, higher rates will have a direct impact on every day consumers like you and me.  If higher rates lessen demand for goods, theoretically, prices will go down, bringing inflation in check. Draconian?  For sure.  Effective? Most definitely.  Will it happen? You can count on it!  When? Nobody knows for sure. BUT, we will get some clues on that today as the FOMC announces the results of its two-day policy deliberations.  

Though the Fed is not likely to announce a rate hike, it is widely expected to make some overtures on bond purchases.  Let’s go over that quickly to refresh your memory.  The Fed is currently buying $150 billion in treasuries and mortgage-backed securities. They do this to keep bond yields low and to inject cash into the economy – it is stimulative.  Up for discussion and much debate is when and how the Bank will taper those purchases.  To be clear, tapering back on those purchases isn’t the same thing as reducing the balance sheet which involves selling bonds.  It simply means that the Fed will slowly buy less and less, reducing the pace of balance sheet expansion.  The Fed, in typical Fed fashion, has been quite aggressively signaling that tapering is in play for 2021, so the markets have most likely factored it in.  Many experts expect the tapering start date along with its pace to be announced at the next FOMC meeting in November.  Those two data points are important because the Fed has made it clear that it wouldn’t hike rates until tapering is complete.  So, a sooner start and quicker pace would imply a sooner rate liftoff. Though the Fed diminishing its purchases will have an effect on bonds yields, the real direct impact to consumers comes with interest rate hikes.  If we want to get a clue of that, we can consult the Fed’s dot plot which details FOMC members’ Fed Funds projections for the future.  They are the ones in charge of voting so, I suppose, their projections are important.  The last dot plot was released in June which showed that a minority of 7 members believed that rates would be higher by the end of next year, while a majority of 13 believed Fed Funds would be higher by the end of 2023.  Today’s release will be scrutinized for any changes since June.  Investors will want to see if there are more defectors into the raise camp for 2022, while 2023 is already expected to be the lift off year, based on past dot plots.  The Fed will also release members’ long term projections for GDP growth and inflation.  Experts are expecting members to turn down 2021 growth expectations due to the recent Delta surge and supply chain bottlenecks.  Fed watchers will be looking to see if members ratchet up growth expectations for 2022 and 2023.  More importantly traders will want to see member projections for inflation.  Do they still consider the current inflation bump up to be transitory?  If so, when do members expect inflation to ease?  We will get some answers today in the policy, plots, and projections release at 2:00 PM EST.  We will also get some more color from the Fed Chair in his statement and press Q&A session.  Buckle your seatbelts and pay close attention.

THE MARKETS

Traders began yesterday’s session by buying the dip, but indexes could not hold onto gains, closing slightly in the red.  The S&P500 Index slipped by -0.08%, the Dow Jones Industrial Average gave up -0.15%, the Nasdaq Composite Index advanced by +0.22%, and the Russell 2000 Index added +0.18%.  Bonds pulled back and 10-year treasury yields climbed by +1 basis point to 1.32%.  Cryptos fell for a second straight day, giving up -4.88% and Bitcoin dropped by -6.0%.

NXT UP

– Existing Home Sales (August) may have pulled back by -1.7% after rising by +2.0% in July.

– The FOMC will release its policy decision and projections at 2:00 PM EST, followed by the Chairman’s press briefing and Q&A.

– Today is the first day of Autumn!