TestingDecember 12, 2018 -
Categorized in: IAG News
Final exam time is approaching for high school and college students. They will test how much cumulative knowledge they have gained from their studies over the last four months. Hopefully they will earn a passing grade from their teacher.
Federal Reserve Chairman Jerome Powell is facing a different kind of test that he, too, must pass.
Ever since his comment that interest rates were “a long way from neutral” on October 3, traders seem to be testing his interest rate hiking resolve.
Sure, some of the recent market turbulence can be attributed to China trade uncertainty and year-end tax planning, but it is also likely that a great deal is attributable to the markets sending Chairman Powell a very clear message – slow down the pace of rate hikes or risk choking off economic growth next year.
The Fed has been consistently preparing the financial markets for a .25% overnight target rate increase at their meeting on December 18-19. We believe they are likely to proceed with the December rate hike to pass their credibility test and show the market who is the teacher and who is the student. If the Fed opts to skip a December rate hike, markets could interpret that as a sign of weakness in leadership and economy.
We do expect that the Fed will include comments in its post-meeting statement, economic update, and press conference that reflect reasons to make future rate hikes very “data dependent.” This would assure the financial markets the Fed is paying close attention to their students’ views.
We are likely to see continued market volatility through mid-December as market students continue to voice their concerns to the Fed teacher over the scope of future rate hikes. Fundamentally, the U.S. economy appears to be on a reasonable growth trajectory heading into 2019, but traders are clearly expressing doubts about whether growth can be sustained through the entire year if there are additional rate hikes.
While rampant speculation about near-term market and economic trends makes life more interesting, it should not lead to unsound adjustments to your long-term financial plan.
Our disciplined process aligns your portfolio risk with your short-term cash flow needs and long-term goals. Hopefully this knowledge will help you pass your current stock market patience test.
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