During its two-day December meeting on December 18-19, the U.S. Federal Reserve elected to raise its benchmark interest rate 25-basis points for the fourth and final time in 2018. Although the Fed’s statement was dovish because FOMC members anticipated two rate hikes in 2019 instead of their previously projected three rate hikes, stock market and Treasury investors felt they could have been more dovish. Since that time, they have drilled stocks and Treasury yields lower.
Last week, U.S. Federal Reserve Chairman Jerome Powell answered that call by issuing dovish remarks that called for the Fed to be patient and not so much in a hurry to raise rates and reduce the central bank’s balance sheet. Investors liked the message he delivered and responded by driving stock prices and yields sharply higher.
On Tap: Fed Meeting Minutes, Slew of Fed Speakers, Fed Chief Powell
This week, investors will get additional chances to respond to the Federal Reserve and the FOMC with the release of the Fed meeting minutes on Wednesday and a slew of Fed speakers throughout the week including Powell on Thursday.
Even though some investors feel Powell greenlit another stock market rally on Friday, others are saying “not so fast”. The question that is going to cause the most volatility in the financial markets continues to be how many times will the Fed raise rates in 2019?
Major Question: How Many More Rate Hikes?
The last Fed statement said at least two, but the way investors responded to Powell, traders may be pricing in fewer than two. The real sticking point for traders is the strength in the labor market versus stubbornly low inflation. While Friday’s robust jobs data for December may be enough to price at least one rate hike into the market, without a corresponding jump in inflation, it will be difficult to do even that. This question may be answered on Friday with the release of the U.S. consumer inflation report.
Given the number of unanswered questions at this time, traders should brace themselves for a volatile two-sided trade over the near-term because investors are going to be particularly sensitive to any reports on inflation and labor.
Market Moving Events: Fed Minutes, Powell’s Speech, CPI Data
This assessment is being supported by the way the data will be presented this week with the Fed minutes on Wednesday, Powell’s speech on Thursday and the CPI data on Friday. Given this layout, one scenario could be bearish-bullish-bearish. In fact there are a number of scenarios that could develop so be flexible.
The best scenario for bullish stock market traders, of course, will be if all three events produce bullish results. One may liken this week’s markets like a slot machine with bullish traders hoping for three cherries.
Fed’s Bostic Sees One US Rate Hike This Year
Atlanta Fed President Raphael Bostic fired the first volley on Monday when he said the Fed may only need to raise interest rates once in 2019.
Bostic said, “I am at one move for 2019.” He based his call on “clouds” that have developed overseas.
“The clouds, the nervousness, has gotten me to a place where I want to make sure that we do not act too aggressively,” Bostic said during an event at the Rotary Club of Atlanta.
Bostic also said the central bank needs to be careful not to go too far and unintentionally tighten credit markets too much.
“This is an area where we have to watch robustly,” he said. The current policy rate of 2.50 percent may be at or close to neutral and “if it is 2.50 and you go to two and three quarters or three, you might have tripped beyond neutral and that would be contractionary.”
This article was originally posted on FX Empire
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