Friday, September 23, 2016

The Fed Can't Hike Without The Stock Market's 'OK'

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*The Fed needs the markets to be ok with a rate hike.
*The Fed keeps referring to the Fed Funds Futures.
*Without the market aboard the Fed likely doesn't raise rates.

The Fed likely can't raise rates unless the market is aboard. They constantly refer to the Fed Funds futures. They know the economy is delicate enough that the stock market (NYSEARCA:SPY) swings can matter. To actually hike rates the Fed will need to be extremely clear to markets. That message will need to emphatically show up in Fed Funds Futures. Then they can hike rates. A November hike would be "off the table" and December is still unclear despite the fed pointing us there.
NY Fed President Dudley called markets "complacent" in August. But what was he saying? Maybe he meant to say "watch out there's a rate hike coming" or maybe he was saying "unless the street's aboard we can't hike rates."
We now think it may be the latter.
Here's his quote from August.
"If you look at futures markets for the federal funds rate, which is the rate that we target, it has basically one rate hike priced in through the end of 2017 - I find that too low. I think the market is complacent about the need for gradually snugging up short-term interest rates over the next year or so."
Wait a minute, the Fed targets the futures markets? That's what he said. The federal funds rate futures markets is the "rate that we target."
What does that mean? It appears he's saying in broad daylight "we need that fed funds futures to tell us something, that's why we target it."
What does he need it to tell the Fed (he said "we")? He needs to see if the street is aboard with a rate hike. If they are not a rate hike will surprise markets and likely cause a crash.
Why should the Fed care so much about markets? Because the economy is as fragile as ever and even more important the Fed repeatedly says they have no ammunition to save it from recession. If the market crashes it can spook consumers. Consumers are one of the last strong cogs of the economy.
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