What can we expect from the Fed this week?

August 19, 2014 1:08 PM

Minutes Coming Wednesday

With the Fed hinting at an interest rate increase sometime in 2015, the financial markets have tended to be jittery before any new Fed-related information comes to light. As noted by The Wall Street Journal, this week is more than Jackson Hole:

Minutes of the Fed’s July meeting, to be released Wednesday, could provide fresh clues on how officials are thinking. One issue that warrants attention: Will the Fed in the future target a specific interest rate, as it did before 2008, or an interest rate range, as it does now? The strategy the Fed is developing strongly suggests it will be the latter at least for a few years.

Handicapping Yellen

On August 18, we hypothesized Janet Yellen may err on the dovish side at this Friday’s gathering in Jackson Hole. MarketWatch provided a similar outlook:

Federal Reserve Chairwoman Janet Yellen will deliver a simple message from Jackson Hole this week: Don’t be fooled by the sharp drop in the unemployment rate. Economists expect Yellen to give a master-class explaining why she believes there is still a lot of slack in the job market…Economists don’t think Yellen will signal any shift in the easy stance of policy at the conference in western Wyoming. Fed officials remain comfortable with their guidance that the first rate hike will come sometime in the second half of next year, said Jan Hatzius, chief economist at Goldman Sachs, in an interview with MarketWatch.

What Is The Fed Watching?

The Fed has a dual mandate; keep prices stable while fostering an environment to achieve maximum employment. The chart below shows interest rates have been held at low levels in an attempt to jump-start hiring.

While the impact of Fed policy on employment is a subject of constant debate, the figures published by Uncle Sam do show an improvement in the unemployment rate.

Support Held Last Week

Since showing the chart below on August 7, the S&P 500 has rallied sharply.

Investment Implications – The Weight Of The Evidence

Based on the improvement in the big picture risk-reward profile for equities, our market model called for an incremental bump to the growth side of our portfolios Monday. Tuesday’s improvement reached levels calling for another “add” to the equity side.

The charts below provide a few examples of “observable improvement”. On August 14 (left below), the S&P 500 remained below several forms of possible resistance, including the 50-day moving average and downward-sloping trendline C. This week, the S&P 500 has successfully cleared both hurdles, telling us the probability of the current rally carrying further is higher today than it was on August 14.

Are there hurdles above? Yes, there are always things to be concerned about both technically and fundamentally. The Fed minutes or something out of Jackson Hole could either propel the markets higher or spook them into a reversal. Therefore, we will enter Wednesday’s session with a flexible stance.

Janet Yellen image from DonkeyHotey Flickr creative commons. The source image for the caricature of Janet Yellen is a photo in the public domain available via Wikimedia. The mimeograph is based on an image in the public domain from Wikimedia. The dollars are adapted from Nadya Peek’s Flickr photostream.

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