Stocks Rally as Traders Bet the Fed Won’t Raise Rates
If the Federal Reserve raises interest rates next week, the world will end. Thus, the Fed won’t raise rates. So buy stocks.
That’s more or less the pretzel logic that’s driving the market this week, with stock indexes rising sharply, commodity currencies soaring, and risk in general finding a bid. All this comes as more and more people come out against a Fed rate hike.
U.S. stocks are rallying sharply. The S&P 500 is up 13 points at 1983, putting it close to the highs of the late August rally, when the S&P got to 1993. If the market is really convinced that it’s sent a message to the Fed, the rally might be able to vault that previous stumbling block. The DJIA is up 132 points at 16623, and the Nasdaq Composite is up 41 points at 4852.
For the record, the effective Fed funds rate, currently, is 0.13%, according to the St. Louis Fed’s Fred database. The rate is set in a range between 0.00%-0.25%, and has been since late 2008. The market is betting heavily against an increase next week. Looking at the CME’s FedWatch page, the market’s has cut odds down to 24% that the Fed will hike next week. A month ago, that number was at 45%.
“It’s not a week for safe havens,” Societe Generale forex strategist Kit Juckes wrote.
A plethora of big names have come out against hiking rates, and more are joining. It not just policy heavyweights like the IMF’s Christine Lagarde. Former Treasury Secretary Lawrence Summers is out with his second piece in three weeks arguing forcefully against a rate increase. Warren Buffett is urging caution. The New York Times editorial page and Martin Wolf of the Financial Times also made the case against it. Even a nominal increase next week, Mr. Wolf said, would send a clear signal to the market that monetary policy was changing direction, in favor of tighter policy, not looser. The problem, he said, is that it still isn’t clear the world is ready for that, or can handle it.
The World Banks’ chief economist, Kaushik Basu, warned the Fed against raising rates. Increasing rates right now would create “panic and turmoil” in emerging markets, along with capital flight. We’re sure there are voices out there in favor of raising rates, but they are being drowned out right now.
Now, all of these people can talk themselves blue in the face, but the bottom line is nobody outside of the Fed’s Eccles Building has any say. There are some voices inside those halls in favor of raising rates, like the Richmond Fed’s Jeffrey Lacker, who made the case last week, and the San Francisco Fed’s John Williams, who’s leaning toward a hike - so long as the economy behaves and risks dissipate.
To that last point, there is one voice outside the Fed that might have some sway: the market. The market has been saying rather noisily that the risks are not dissipating, that they are in fact increasing. The market certainly thinks that message has been heard, which is why it’s now rallying. But in making everything look so bright and green all of a sudden – even China’s batter stock market rallied – is the market undercutting its previous message? “If a higher stock market is the Fed’s implied third mandate, then are we rallying into a rate hike next week?” Lindsey Group’s Peter Boockvar asked.
Just another twist of the pretzel.