The Federal Reserve on Wednesday may not be able to sound easy enough to satisfy expectations — including those of President Donald Trump who wants the central bank to stop raising interest rates completely.
So many investors expect the Fed to be dovish when it gives its highly-anticipated decision on interest rates that some strategists say there’s risk of a negative market reaction because the central bank may just not be able to sound quite acommodative enough.
Some stock strategists have been hoping the Fed would provide a catalyst to reverse recent losses, even if it does raise rates, as expected.
“Investors are close to extreme bearishness,” notes Michael Hartnett, Bank of America Merrill Lynch chief investment strategist. “All eyes are on the Fed this week, and a dovish message could equal a bear market bounce.”
The S&P 500 rolled over on Tuesday and closed up less than one point, after attempting to rally after Monday’s steep losses. With the benchmark down about 5 percent for the year, there is mounting pressure on the Fed to give a nod to the volatility in the financial markets.
The consensus view is that the Fed will raise interest rates Wednesday by a quarter point — a hawkish signal. But the Fed should also immediately temper that tone by reducing its forecast for future interest rate hikes, eliminating at least one hike for next year. The Fed is also expected to reduce its forecast for the economy and possibly lower its inflation outlook, while emphasizing that future policy move will depend on the strength of the economy.
“Equities are hoping that the Fed is almost done or [for] signals that they’re going to pause. I think it’s too premature for them to do that,” said George Goncalves, head of fixed income strategy at Nomura. “The Fed was a little too optimistic for next year, and now they’ve got to come down. The recent price action is almost an overshoot on the bearish side.”
Trump has made it clear, in tweets and comments, that he would like the Fed to stop raising rates altogether.
“They’re going to have to change their view, not because they’re reacting to pressure that’s coming from the president, they’re going to keep emphasizing their independence,” said Goncalves. “It’s in many ways because financial conditions have weakened, that’s the catalyst…not because of the pressure.”
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