Market Commentary

Weekly commentary providing analysis with an outlook for the equity market.

September 20, 2017

Scott Wren, Senior Global Equity Strategist

This Fed Meeting Might Actually Not Be a Dud

  • The vast majority of Federal Open Market Committee (FOMC) meetings in this recovery held only a very small chance of producing truly meaningful monetary policy changes.
  • However, this week’s meeting might be different if the Federal Reserve (Fed) changes its hinted pace of interest rate hikes through 2018.

Download the report (PDF)

For almost the entire duration of the current economic recovery (now in its ninth year), this strategist has labeled most of the Fed’s monetary policy meetings as likely being “duds.” The reason, in case you missed these numerous previous missives, was largely based on the belief that nothing meaningful in terms of policy changes would be announced at nearly any of these meetings. Recall that our central bankers dropped the fed funds target rate to virtually zero in December 2008. Then, against nearly all historical precedents (and odds), they held the target rate steady at that level until December 2015. Seven years of near-zero interest rates helped the economy slowly crawl back from the depths of the financial crisis and probably kept us out of a depression.

But we are well past the point where Armageddon-style monetary policies are necessary, at least in our opinion. The Fed needed to get rates off the floor and has proceeded slowly in that endeavor. Now, with economic growth north of 2 percent this year and next, based on our macro team’s forecasts, it makes sense for our central bankers to continue to move rates slowly higher. But, one might ask, how much is too much? That is a key question as the ebb-and-flow of the economic cycle is determined mostly by interest rate policy coming out of the Fed. Leave rates too high for too long and the end result is typically a recession or at least a noticeable slowdown. Higher interest rates typically discourage borrowing and spending by consumers and businesses. And that is the last thing the Fed wants to do right now.

This week’s FOMC meeting has the potential for a few fireworks, at least if you are into deciphering what drives the economy and the stock market. In this strategist’s opinion, much of the recent push to new highs in the S&P 500 Index is based on the perception that the Fed will alter (slow) its hinted pace of rate hikes, especially when looking forward to 2018. A good portion of economic reports released over the last few months reflects an economy that is not accelerating and inflation that is tracking lower rather than higher toward the 2 percent level Fed Chair Janet Yellen and company keep telling us they expect to see. Fed funds futures are currently showing a 50/50 chance of the Fed hiking rates at the December meeting. It wasn’t that long ago that the market considered a December rate hike to be a done deal. Note that our Fixed Income team is still calling for a hike in December.

Of particular interest to the market will be what the update of the Fed’s “dot plot” shows. Will fewer Fed officials be in favor of three rate hikes in 2018? The equity market sure seems to be thinking that will be the case. Or will the Fed hold pat and hint that four rate hikes are still in the cards between now and the end of next year? If that is the outcome, stocks might not respond in a positive fashion.

So given the potential for a meaningful change in guidance, or not, this week’s Fed meeting might actually not be a dud.

Risk Considerations

All investing involves risks including the possible loss of principal. Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.

Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.

Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.

Special Reports

A collection of the most recent thematic reports from Wells Fargo Investment Institute that cover varying topics of interest and importance to investors.

Read Our Insights