Volatil­ity height­ens fo­cus on Fed state­ment

The Star Malaysia - StarBiz - - The Wall Street Journal - By SAM GOLDFARB

IT’s that time again – when Wall Street traders turn into lin­guists, closely pars­ing the text of a Fed­eral Re­serve state­ment for mi­nor word changes that could of­fer clues about the cen­tral bank’s fu­ture mon­e­tary poli­cies.

Few peo­ple ex­pect the cen­tral bank to raise its key pol­icy rate above its cur­rent tar­get of 2% to 2.25% when the Fed con­cludes its two-day meet­ing Thurs­day. There is also no press con­fer­ence af­ter the meet­ing, lim­it­ing of­fi­cials’ abil­ity to com­mu­ni­cate their out­look.

Of­fi­cials will, how­ever, re­lease a state­ment that an­a­lysts say could po­ten­tially tip in a dovish or a hawk­ish di­rec­tion.

A glanc­ing ref­er­ence to re­cent mar­ket vol- atil­ity or tight­en­ing fi­nan­cial con­di­tions could be in­ter­preted as a sign that of­fi­cials are tak­ing that volatil­ity se­ri­ously, and pro­ceed­ing cau­tiously about rais­ing in­ter­est rates should it con­tinue. At the same time, a ref­er­ence to ris­ing wages or other forms of in­fla­tion pres­sure could send the op­po­site sig­nal: that of­fi­cials are more con­cerned about in­fla­tion than skit­tish mar­kets and are pre­pared to raise rates even faster than in­vestors are an­tic­i­pat­ing.

Ei­ther move could send rip­ples through mar­kets while many in­vestors re­main un­cer­tain about the eco­nomic out­look. There is now lit­tle doubt the econ­omy is do­ing well. The ques­tion is whether it is do­ing too well, with in­vestors in­creas­ingly ner­vous that there could be an up­swing in in­fla­tion or a hawk­ish turn by Fed of­fi­cials in­tent on mit­i­gat­ing the in­fla­tion threat.

A big rea­son why US gov­ern­ment bonds, and then US stocks, de­clined in re­cent months was ris­ing un­cer­tainty about in­fla­tion ex­pec­ta­tions and the Fed’s po­ten­tial re­sponse, said Karissa McDonough, a fixed-in­come strate­gist at Peo­ple’s United Wealth Man­age­ment.

The con­clu­sion of the US midterm elec- tions may have curbed some of that un­cer­tainty, as an­a­lysts fore­see slim­mer odds that Congress could stoke the econ­omy through ad­di­tional fis­cal stim­u­lus. Yet much re­mains un­known, with re­cent data show­ing un­em­ploy­ment at a 49-year low and US work­ers earn­ing their big­gest pay raises in nearly a decade.

If Fed of­fi­cials lean harder in a hawk­ish di­rec­tion—sug­gest­ing they’ll keep rais­ing rates to the point where it cur­tails eco­nomic ac­tiv­ity – in­vestors can ex­pect more volatil­ity, said Priya Misra, head of global rates strat­egy TD Se­cu­ri­ties in New York.

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