The U.S. Federal Reserve assured markets on Thursday evening that its influential federal funds rate was not about to move higher any time soon – an assurance some observers took to mean that the key rate will remain near zero per cent for at least a few more months.
However, as the Wall Street Journal points out on Friday, the futures market has already begun to price in rate hikes. Before Thursday’s Fed announcement – in which the Fed raised its discount rate by a quarter of a percentage point – markets had priced in one increase in the federal funds rate this year and a 28 per cent chance of a second rate hike. After the Fed announcement, though, the chance of a second rate hike this year jumped to 50 per cent.
Meanwhile, stock markets now appear to be taking in stride Thursday’s surprise move by the Fed, with the Dow Jones industrial average down a mere 7 points in mid-morning trading – in part because while the timing might have taken traders and investors unawares, the move had been telegraphed by the Fed in an earlier statement. Here are a few thoughts on the matter.
David Rosenberg, chief economist and strategist, Gluskin Sheff: “Those pundits laying claim that what the Fed is doing is great news for the stock market because it is somehow ratification of the view that we are into a sustainable growth phase should heed what has happened in China this year, and also understand that the reason the S&P 500 could muster a 70 per cent rally off the lows of last March in advance of anything beyond ‘green shoots’ in the economy was in large part because of all this Fed- induced liquidity. While the initial reaction to the Fed’s move may be overdone, we are still at the tip of the iceberg and the one thing Mr. Market does not like is the uncertainty when the game starts to change.”
Ben Joyce, strategist, BMO Nesbitt Burns: “Given market resilience during past rate upturns, the further delay before tightening in the current cycle, and the likely gradualist approach to this tightening, it appears too early to become defensive. Within the S&P/TSX, the energy, chemical and fertilizer, and telecommunications services sectors showed strong relative performance during the last five rate upturns. Consumer and financial sectors performed poorly.”
Stéfane Marion, chief economist and strategist, National Bank Financial: “Having already announced that it was letting its emergency lending programs expire according to its pre-established schedule, today’s action should be seen as a logical step along the path of further normalization of the Federal Reserve’s lending facilities. Despite this move, the gap between the Fed Funds target rate and the discount remains below its pre-crisis level of 100 basis points. Today’s announcement does not alter our view that the change in the Fed’s monetary policy stance will begin in August of 2010.”
