Price of Uncertainty
At i Fund Cities, we preach how markets and investors do not like uncertainty. This was evidenced most recently by the market’s reaction to the last Fed meeting at the end of October.
Federal Reserve Chair Jerome Powell’s non-committal rhetoric highlighted an underlying feeling of uncertainty towards the future path of monetary policy. As a result of the increase in perceived risk, we saw U.S. Treasury yields rise and “risk assets” fall.
Markets can’t put all the blame on the Fed for the recent selloff.
The Fed’s dual mandate is to achieve price stability while maintaining a healthy labor market. Historically, that has meant keeping inflation around 2% and unemployment around 4%. They monitor key government data releases such as nonfarm payrolls, unemployment rate, the Consumer Price Index (CPI), Personal Consumption Expenditures (PCE), and more to make monetary policy decisions and work towards their goal. However, none of this data has been available since the government shut down on October 1st so, in a sense, they’ve been flying blind.
Some Positive News
Tuesday brought markets some positive news as the Senate officially passed spending legislation establishing increased certainty that the government shutdown was nearing its end, which caused the stock market to rally. On Wednesday, the House approved the Senate funding package and President Trump signed the bill into law.
While this was positive news for the market, stocks fell sharply on Thursday over concerns that the Fed would hold interest rates steady at the December meeting, as detailed in the chart below. Futures markets are pricing in a 50/50 chance between a 25bps cut and no action from the Fed. This uncertainty is cautioning markets and investors.
What’s Next?
It all comes back to certainty … now that the government shutdown has ended, investors are anxiously awaiting the Labor Department’s September jobs report as well as data releases on inflation that were suspended during the shutdown.
Federal Reserve Committee members need this data to make confident votes on policy decisions at the next Federal Open Market Committee (FOMC) meeting in December. Once the Fed has its vision back, it can begin to set expectations around the future path of monetary policy, giving markets and investors alike the certainty they so crave.
Stay tuned for our November webinar, where we’ll provide an update on the data and what the market is expecting to see at the December Fed meeting.