Hike or not, Yellen likely to be real market mover
Chief of central bank sure to face a hail of questions over Fed’s reasoning
Fed communications after the decision will be most important, economist says.
Thursday’s the day Wall Street finally finds out if the Federal Reserve will hike interest rates for the first time in nearly a decade. But hike or no hike, what could really move markets is what Fed Chair Janet Yellen says in her post-meeting press conference about the U.S. central bank’s decision and its future rate plans.
“Watch what they say,” Michael Hanson, U.S. economist at Bank of America Merrill Lynch, advised clients in a research note. “For the markets, Fed communications after the decision will be most important.” The stakes are high. The Fed hasn’t boosted interest rates since mid-2006 and has kept short-term borrowing costs pegged close to 0% for almost seven years to nurse the economy and markets back to health after the worst economic downturn since the Great Depression. The U.S. stock market has tripled since the low in March 2009, and many market pros say the Fed’s unprecedented stimulus has powered the rally and led to the market’s current overvalued state.
But now it’s decision time for the Fed, as the U.S. economy is growing and no longer in crisis and the unemployment rate is at a seven-year low of 5.1% — key data points that suggest the time is right for a rate hike. Still, it’s a close call as the Fed has to decide whether U.S. strength is enough to offset headwinds, such as global market turbulence and a slowing economy in China, the world’s second-biggest economy.
That’s why if the Fed pulls the trigger or not when it breaks from its two-day meeting Thursday at 2 p.m. ET, the Fed and its chief will have a lot of explaining to do. Yellen will face a barrage of questions to explain the Fed’s thinking when she faces off with reporters at 2:30 p.m. ET.
“Either way, Yellen has to explain the Fed’s action and telegraph their intentions,” Jack Ablin, chief investment officer at BMO Private Bank told USA TODAY. If the Fed hikes rates, the “attention immediately shifts to the trajectory” of future hikes, adds Ablin.
Wall Street expects the Fed’s message, both in its post-meeting statement and Yellen’s comments to reporters, to be “dovish” — code word for not being in a rush to push rates up sharply higher.
Investors will want to know if the Fed is sticking by its promise of raising rates slowly and “gradually.”
If the Fed raises rates, the “attention immediately shifts to the trajectory” of future increases, says Jack Ablin of BMO Private Bank.