It’s game-day for the Federal Reserve. The biggest announcement central bankers have made in perhaps the past two decades comes down to this – a game-time decision.
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The policy-setting Federal Open Market Committee will either start raising interest rates Thursday, inching monetary policy back toward the days before the 2008 financial crisis, or delay ‘normalization,’ probably at least until December or 2016.
No one – apparently not even the central bankers themselves – was certain in the days leading up to this week’s meeting which direction the Fed would go given the mixed economic data that arrived over the summer. U.S. economic data was, for the most part, strong, especially labor-market data, but global markets were roiled in August by bad news out of China.
The disparity left central bankers with a dilemma and analysts scratching their heads as to what the Fed should do. A decision that seemed a no-brainer in July – raise rates in September – suddenly turned into an agonizing quandary.
Recently retired Philadelphia Fed President Charles Plosser addressed that dilemma Thursday morning on FOX Business Network in an interview with Maria Bartiromo, just hours before the Fed’s announcement.
“I don't know the answer to whether they know what they're going to do or not, but I'm sure there's a very lively debate,” Plosser said. “They're debating all the issues that all the news programs and financial markets are talking about. And it's going to be a tough decision. It's going to be a probably a pretty close call I think.”
Either way, the decision is sure to have a dramatic ripple-effect throughout global markets.
Nicholas Colas, chief market strategist at Convergex, said recent stock and bond trends suggest traders are betting the Fed will hike rates today.
“Over the last five days, every sector of the S&P 500 is up at least 1%. Financials, in theory the most rate-sensitive sector, are also the best performing group (+4.0%). The index as a whole is up 2.8%,” Colas said in a research note.
“And the yield on the two year Treasury note sits at 81 basis points. The last number is the most telling, since that’s the highest yield since early 2011 and this part of the yield curve tends to be the most attuned to short term rate moves,” he added.
Colas said markets are gearing up for not only a rate hike but also a positive forecast by the Fed. In addition, traders want guarantees from central bankers that rates will move higher slowly over the next couple of years.
In other words, they want their cake and to be able to eat it, as well.
“In short, the Federal Reserve better deliver both a hike and a chirpy outlook while still tamping down worries over the pace of future rate increases. Will markets stay positive if the Fed fails to deliver in form and substance? We doubt it,” Colas said.
Meanwhile, in a reflection of the profound uncertainty surrounding today’s decision, other analysts said market signs suggest the Fed will delay liftoff.
Craig Erlam, an analyst with foreign exchange firm Oanda, said markets have become “hooked” on the easy money generated by low interest rates “and appear in denial about the need to raise them.”
“Fed Chair Janet Yellen has given numerous warnings that they plan to raise rates this year and they have clearly fallen on deaf ears,” he said.
The Fed may want to raise rates today if for no other reason than to eliminate the uncertainty permeating markets and the overall financial landscape, Erlam added. If the Fed holds off today, the next likely move wouldn’t be until December, he said.