The anticipated Federal Reserve rate hike has come and gone.
On Wednesday, the Fed raised interest rates for the third time since the financial crisis, taking its target range for the Fed Funds rate to 0.75%-1% from 0.50%-0.75%.
The three big storylines to emerge from were the Fed making its 2% inflation target “symmetric,” the Fed keeping its expectations for the number of rate hikes in 2017 at three, and Minneapolis Fed president Neel Kashkari voting against a rate hike.
But with the Fed out of the way and markets seemingly disinterested in reacting to any of the seeming chaos — and lack of action — coming from Washington, D.C., the question now becomes what to focus on or worry about next.
As Bloomberg View columnist Matt Levine wrote on Friday, “An underrated piece of poetry in finance is that the opposite of fear is complacency, and you should fear complacency.” Currently, the VIX — which is often called the “fear index” — is doing nothing, indicating that expected future volatility remains fairly low.
This complacency, then, is enough to be afraid of on its own. Or, alternatively, there’s never not a reason to be concerned about markets.
For investors looking for a catalyst, this week may very well be disappointing. The economic data calendar isn’t filled with any reports that should be big market movers. There will, however, be a few big corporate earnings announcements to contend with, notably Nike (NKE), FedEx (FDX), Lennar (LEN), and Restoration Hardware (RH).
- Monday: Chicago Fed’s national activity index, February (0.03 expected; -0.05 previously)
- Tuesday: Current account balance, fourth quarter (-$128.2 billion expected; -$113 billion previously)
- Wednesday: FHFA house price index, January (+0.4% expected; +0.4% previously); Existing home sales, February (-2.4% expected; +3.3% previously)
- Thursday: Initial jobless claims (240,000 expected; 241,000 previously); New home sales, February (+2.1% expected; +3.7% previously); Kansas City fed manufacturing, March (14 expected; 14 previously)
- Friday: Durable goods orders, February (+1.2% expected; +2% previously); Durable goods orders, non-defense, excluding aircraft (+0.6% expected; -0.1% previously); Markit Economics flash manufacturing PMI, March (54.7 expected; 54.2 previously)
As we mentioned at the top of this post, Minneapolis Fed president Neel Kashkari voted to keep interest rates unchanged following the Fed’s latest meeting.
His dissent, on its own, is not notable. But his follow-up post on Medium — published on Friday — was.
The simple summary from Kashkari is as follows:
I dissented because the key data I look at to assess how close we are to meeting our dual mandate goals haven’t changed much at all since our prior meeting. We are still coming up short on our inflation target, and the job market continues to strengthen, suggesting that slack remains. Once the data do support a tightening of monetary policy, I would prefer the next policy move by the FOMC to be publishing a detailed plan that explains how and when we will begin to normalize our balance sheet. Once we put that plan in place, and we see the market reaction to it, we can return to using the federal funds rate to remove monetary accommodation when the data call for it.
In short, risks remain asymmetric and Kashkari would prefer the Fed use its balance sheet, not interest rates, to outline its future plans.
Elsewhere in his post, however, Kashkari makes a few great observations about markets, what they say, and what they don’t. “Financial markets (both the stock and bond markets) seem to be pricing in some form of fiscal stimulus, perhaps tax cuts and/or increased spending, and perhaps a reduction in regulations from the new Administration and the new Congress,” Kashkari writes.
“Those developments could be important to overall economic growth and, by extension, to the future path of monetary policy. But we have little information about what those new policies will actually be, what their magnitude will be and when they would take effect.”
And as Fed Chair Janet Yellen made clear in her press conference held Wednesday after the Fed’s policy announcement, any potential fiscal plans — infrastructure spending or tax cuts, for example — are not yet firm enough to influence the Fed’s thinking about future growth and inflation. Certainly, these things are in the background, but as the Fed makes clear in its communications, it is data dependent, not data anticipatory.
Markets, however, don’t operate that way. And while many view the Fed and rates markets as being involved in a struggle over who is the dog, who is the tail, Kashkari makes clear the Fed doesn’t see it this way.
“Markets are guessing,” Kashkari writes.
“Financial markets are good at some things, but, in my view, notoriously bad at forecasting political outcomes. They didn’t forecast Brexit. They didn’t forecast the results of the U.S. presidential election. I don’t have much confidence in their ability to forecast fiscal policy given how little we know today. So I am not yet incorporating the markets’ guesses about fiscal policy changes into my outlook for the economy.”
At the top of this post, we discussed the relationship between the VIX, fear, concern, and what happens next in markets.
If chaos is breaking out in markets — perhaps like it did back in the beginning of 2016 when vague fears about China sent stocks off more than 10% peak-to-trough — then the VIX will be elevated. Fear is clearly seen. If the VIX is low, then this complacency is also something to worry about.
Though as Kashkari notes, markets are guessing. In this context, about what Trump’s policies do or do not accomplish.
But the observation is much broader than that — markets capture the hopes, the fears, and the guesses of investors. Oftentimes you’ll hear markets discussed as if they are cold, calculated forces that cannot be overcome or challenged and that the market does what the market does.
Which is sort of true, but, as Kashkari notes, is also not.
The market guesses and forecasts and then adjusts. Just like the Fed it so often criticizes.
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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