Stocks Rise, Fed Watch

Highlights of this Week’s Update:

1. Third date added for Annual Client Appreciation Event due to popular demand: October 15^th. Call today to reserve your seats.
2. S. stock indices gained ground last week but remain negative so far in 2015.
3. Oil, Gold dropped, interest rates eased slightly higher.
4. All eyes on the FED meeting this week: Will they raise rates or not?

READ ON FOR FURTHER DETAILS……………………………………………………………. 

Annual Client Appreciation Events Filling Fast:

We have scheduled this year’s Client Appreciation event to be held at the Broadway 10 Restaurant and Chop House in Oklahoma City.  We had originally scheduled two different dates to choose from: October 8^th and October 13^th.  Both those dates have already been filled, so we are pleased to offer a third date due to popular demand.  Thursday, October 15^th has been added in order to accommodate those of you that have not yet called to make your reservations.  Please be sure to call today, as seating is limited and we look for this third date to fill up quickly as well.

The Markets:

Last week saw another turnaround to the upside for the major U.S. stock indices.  The Dow Jones Industrial Average gained 2.05%, but still remains down 7.8% year-to-date through Friday’s close.  The Standard & Poor’s 500 rose 2.07%, and is now 4.75% lower for 2015 as of September 11th.  (MarketWatch)    This was the 4^th best weekly gain for the S&P 500 so far in 2015. (dshort.com)

Oil prices weakened, with the price of West Texas Intermediate Crude Oil dropping $1.01 ending last week at $44.76 per barrel.  Gold also fell, dropping $17.00 per ounce, finishing Friday at $1,101.25.  (CNBC)

Interest rates eased higher with the yield for the 10 year U.S. Treasury rising to 2.20%, up .07% for the week. (U.S. Treasury)  The National average for a 30 year fixed rate mortgage ended Friday at 3.96%, and the 15 year fixed rate stood at 3.07%.  (Bankrate.com)

9 Reasons to Raise and 9 Reasons Not to Raise the Fed Funds Rate

The Federal Reserve’s two-day meeting concludes on this coming Thursday, and it is the first meeting in almost 10 years that might bring about a hike in the fed funds rate.  Volatility in the financial markets will most likely continue this week, especially leading up to the Fed meeting and also immediately following.

The target for the fed fund rate, which is the overnight rate banks use to lend cash to each other, is 0 – 0.25%. Along with the rate decision, Fed officials will update their economic projections, and Fed Chief Janet Yellen will preside over her quarterly press conference. How she frames the decision may be just as important, if not more important, than what the Fed ultimately decides.

While there has been an enormous amount of focus on “liftoff,” the term used to describe the first rate increase in nearly a decade, there’s probably too much emphasis on this one event. As Yellen as repeatedly said, it’s the trajectory of rates over the next couple of years that should be the focus.

Why raise rates at the September meeting?

1.  The economy is at full employment and the fed funds rate is still near zero.
   • August’s jobless rate of 5.1% rate (Bureau of Labor Statistics) is in the middle of the Fed’s full employment range of 5.0 – 5.2% (Fed Economic Projections).

1. A near zero fed funds rate is an emergency rate. We’re beginning year seven of the economic recovery (National Bureau of Economic Research) and the Fed has yet to boost rates.

1. Rock bottom rates against the backdrop of an economic expansion can encourage bubbles and instability, as consumers, businesses and investors make decisions based on artificially low rates.

1. Even after a 0.25% hike (assuming we don’t get something smaller), policy remains quite easy.

1. The U.S. economy accelerated in the second quarter (Bureau of Economic Analysis-BEA) and could handle a 0.25% rate hike.

1. A cloud of uncertainty over markets would be lifted, as the Fed finally found the courage to pull the trigger, even if baby steps are the most likely path.

1. The Fed could raise rates and keep a very dovish tilt.

1. It would likely be viewed as a sign of confidence in the economy by the Fed.

1. Some evidence of wage pressures caused by labor market tightening per the Fed Beige Book.

Why should the Fed hold off?

1. Inflation has failed to move up to the Fed’s target of 2% (BEA), commodity prices are languishing near 15-year lows (Bloomberg), and market-based measures of inflation expectations have fallen (St. Louis Federal Reserve).

2. Rising rates may attract additional foreign funds, which could further boost the dollar and compound headwinds for U.S. exporters and manufacturers.

1. The unknown impact of a move given financial instability and problems in China.

1. Centrist voting officials at the Fed (there are 10 Fed officials that vote at each meeting) have become more reluctant to support a September rate increase.
   • 3 centrists have toned down talk of a September rate hike (Wall Street Journal, CNBC).

1. 62% of analysts do not expect a September rate hike per the latest CNBC survey.
   • A rate hike isn’t being discounted by markets and the Fed typically likes to avoid surprises.

1. A rate hike might exacerbate financial market instability, especially in emerging markets.

1. The International Monetary Fund has asked the Fed to hold off until next year, and the World Bank warned last week of “panic and turmoil” in emerging markets if the Fed hikes (Wall Street Journal).

1. We still have two more meetings – October and December – in which the Fed could act this year.

1. No matter what the Fed does, it’s unlikely to be a unanimous 10-0 decision. The Fed may be reluctant to embark on a policy shift, even if the turn is gradual, with a 6-4 or 7-3 decision.

• Such a divided public front could create unwanted uncertainty for markets.

Bottom line—

The uncertainty surrounding the upcoming meeting is in contrast to signals in July and early August, which suggested a consensus was forming at the Fed to raise rates this week.  The correction in stocks and uncertainty in China and emerging markets are to blame for the shift. Nevertheless, you can see that a case can be made for either scenario.

There will never be a perfect time to start raising interest rates, but the uncertainty in today’s global environment gives central bankers plenty to chew on at the two-day meeting.  It will be good to get this particular meeting behind us so the markets can move forward knowing the outcome after Thursday’s announcement.

We appreciate the privilege to serve each and every one of you and look forward to working together in the years to come.  Please don’t hesitate to call if you have any questions, or if we can be of further service in any way.

God Bless,

Your TEAM at F.I.G. Financial Advisory Services, Inc.

 

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