Investors Turn Focus to Fed Signals
By Sam Goldfarb, bond market reporter
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%-2.25% when the central bank concludes its two-day meeting Thursday. There is also no press conference after the meeting, limiting the ability of officials to communicate their outlook.
Officials will, though, release a statement that analysts say could potentially tip in a dovish or a hawkish direction.
A glancing reference to recent market volatility or tightening financial conditions could be interpreted as a sign that officials are taking that volatility seriously and could be cautious about raising interest rates if it continues.
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 at a time when many investors are 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 U.S. government bonds, and then U.S. stocks, declined in recent months was an increase in uncertainty about inflation expectations and the Fed’s potential response, said Karissa McDonough, a fixed-income strategist at People's United Wealth Management.
Some of that uncertainty may have been removed with the conclusion of the U.S. midterm elections, which many analysts say has reduced the chance that Congress could further stoke the economy through additional fiscal stimulus.
Yet much still remains, with the recent data showing the unemployment rate at a 49-year low and U.S. workers garnering 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.
"Risk assets will not like that at all," while yields on short-term Treasury notes would likely shoot higher, she said.
Market Facts
- The tech-heavy Nasdaq Composite, which plunged into correction territory about two weeks ago, has climbed in five of the last seven sessions and is now 6.6% below its August all-time high and back up 9.7% for the year.
- Wednesday marked the first time the S&P 500 rose at least 1% the day after a midterm election since 1982, according to Dow Jones Market Data. That was also the last time the president was Republican, Democrats had a majority in the House of Representatives and the Senate majority was Republican.
- On this day in 1993, one of the hottest IPOs in history hit Wall Street as Boston Chicken went public at an initial price of $20 a share. The stock leapt 142.5% to close at $48.50 (or 269 times earnings), giving it a market value of $800 million. Less than five years later, Boston Chicken filed for bankruptcy protection; McDonald’s later bought the chicken chain for just $173.5 million.
Are you closely monitoring Fed signals late in the year? Let the author know your thoughts at sam.goldfarb@wsj.com. Emailed comments may be edited before publication in future newsletters, and please make sure to include your name and location.
