Like an expert poker player, the Federal Reserve has the markets on edge, leaving investors to wonder whether they’re going to raise or fold. Instead, they’re doing the interest policy version of a check–keeping the federal funds rate unchanged, and now the markets are in a state of uncertainty.
“The problem is that this shift has only created an extra layer of uncertainty in the rate outlook,” wrote Kevin Flanagan, Head of Fixed Income Strategy at WisdomTree Investments. “Ah, remember the good ol’ days (last year) when the Fed telegraphed their moves? Well, that’s all changed now. So, while the debate for 2019 and 2020 seems to have gravitated toward when the Fed will actually cut rates, I offer a different take. What if the FOMC goes on a ‘policy sabbatical’ of sorts, and just leaves well enough alone? In other words, just sits back and lets the economy ‘run hot.'”
The central bank elected to keep interest rates static, the markets dipped into the red with the Dow Jones Industrial Average falling almost 300 points the last two sessions. With a U.S.-China trade deal already priced into the markets, investors were looking for another trigger event–a rate cut–except the Federal Reserve passed on that notion and stayed put.
“In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes,” the Federal Open Market Committee’s policy statement read.
Fed Chairman Jerome Powell reiterated his ongoing message of patience as the wait-and-see approach by the central bank continues to persist.
“If I’m right and the Fed is in an elongated pause mode, the Treasury market is going to have to come to terms with the potential for economic growth running a bit hotter than originally expected,” Flanagan wrote. “How would, say, the UST 10-year yield respond to this new policy environment? Probably just by continuing on its merry, range-bound way, until the time comes when investors suddenly wake up one day and wonder, Is the Fed now behind the curve?”
One might think that with rates remaining steady, it could be a boon for other parts of the market like housing by way of cheaper loans. However, mortgage application volume fell 4.3 percent last week comapred the previous week, according to the Mortgage Bankers Association.
Will the Fed’s poker face continue to keep investors on the sidelines until a definitive move by the central bank becomes more apparent? It will be interesting to see if investors can pick up on tells in the latest Fedspeak until the next rate announcement.
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