With the Federal Reserve claiming another interest rate hike is imminent; it’s understandable that Wall Street is more or less unconcerned.
The bond market does not reflect the Feds oft repeated message that a hike may come as early as next month, pricing at a 29 percent chance of it occurring. The first rumors of increases came last year but the Fed retreated on that view as data showed the U.S. economy may very well fail to deliver. Even after the latest Fed minutes from Wednesday, the markets remained fairly neutral.
“It’s been an observed habit for the Fed specifically, and central banks in general, to get rather intrusive attempting to influence the direction of rates, but the market has remained unmoved,” said Derrick Noble, Vice President of Corporate Trading at Fidea Group. “There are several factors which can limit the direction of rates independent of the Feds sphere of influence.”
Investors see a few hurdles to jump before the Fed’s predictions of a rate hike are realized. For example, the British referendum on their continued involvement in the E.U. at the end of June may affect matters. There is also the gain in the dollar and China’s economic growth downturn to take into account.
Growth momentum in the U.S. economy has failed to prolong itself like it did in previous interest rate movement cycles, much to the chagrin of the Fed. This limits their ability to make high impact decisions that will carry investor sentiment.
“The economy just doesn’t have that overdrive factor that would allow the Fed to take decisive action,” Christopher Low, economist at FTN Financial, said to clients on Wednesday.
Partly to blame has been the dollar. Profits for global corporations decrease leading to pressure on U.S. stocks, all caused by a rising dollar in response to gossip of interest rate hikes. The end result is a lot less “oomph” in the economy.
The 17 percent gain of the greenback against its peers over the past couple of years has helped depreciate commodities, priced in dollars. If we see the same cycle repeated it will advance concerns that the energy sector could fall victim to more mass defaults. Also, it could weaken the currencies of emerging markets.
At the end of the first quarter the Fed went quiet on interest rates after the Chinese yuan took a nose dive and the markets were rocked by capital overflows.
