Rally in Stocks Takes Heat Off Fed, Now They Talk Rate Hikes Again, Market Expectation of a Rate Hike Spikes

But all bets are off if something big breaks.

Since the low point on Christmas Eve, the S&P 500 has rallied 9.9%, nearly half of which on December 26. This was helped along by the word “patient,” used by Fed Chairman Jerome Powell, other Fed governors, and the FOMC minutes. The effect: Wall Street has stopped haranguing the Fed about the rate hikes and the QE unwind, and the White House has stopped leaking titillating tidbits about President Trump wanting to fire Powell. The dust is settling.

And now the Fed governors are fanning out to talk about rate hikes again, adding the soothing terms as “patience” or “wait,” and disagreeing with each other, as they usually do in public to keep the debate going on how many rate hikes will eventually happen.

In early 2018, the markets expected two rate hikes for that year. Fed governors gave speeches throughout the year that gradually removed the disagreement over how many rate hikes, and in the end, they voted unanimously for four.

When it comes to rake hikes that are more than a couple of months away, the market’s expectations are way off. Markets don’t want rate hikes and bet against them until the rate hikes move closer into view, then gradually they climb on board.

Market expectations or a rate hike suddenly spike.

At the beginning of January, markets put a 2.5% chance – in essence nil – for one rate hike by the end of 2019. But over the past three days, this probability spiked to 27.6% by this morning and tapered off some during the day (chart via Investing.com, based on 30-Day Fed Fund futures prices).

In the dot-plot at the December meeting, FOMC members had a wide-ranging view of how many rate hikes they saw in 2019, but the median projection was for two rate hikes.

The new twist: the words “patient” and “wait” are cropping up everywhere. There’s now a consensus that the dust would need to settle and markets would need to get used to current monetary policy, which would still need to work its way into the financial markets and tighten financial conditions further, which will take time, before the next steps will be taken.

So four Fed governors communicated with the public about rates today. One thing they agreed on is the strength of the US economy in 2018; and they expect solid but slightly less growth in 2019. Here are a few things that these appearances have confirmed:

  • Fed governors are successfully talking up the markets – such as in Boston Fed President Rosengren’s comment that financial market sentiment “may have become unduly pessimistic.”
  • As they succeed in talking up the markets, heat comes off the Fed, and it can pursue monetary policy without the White House breathing down its neck.
  • The consensus at the Fed emerged that “patient” is the new key word. This seems to apply only to the first half of 2019.
  • Rate hikes are not off the table. As the second half approaches, they’ll be put back on the front burner.

So here we go.

Atlanta Fed President Raphael Bostic, a voting member on the FOMC this year, used the word “patient” three times in his speech today. Then he vaguely laid the groundwork for a possible quarter-point hike to bring policy, which has now “come close to achieving a neutral policy stance” to an actual neutral stance, but for now sees no reason to take it beyond neutral.

He said he expects “another year of solid growth,” though “bit slower than in 2018 as the temporary effects from fiscal stimulus and tax reform begin to fade”:

“This is an economy that, by all appearances, ought to be able to stand on its own, without much support, or accommodation, from monetary policy.”

“And it is largely from this standpoint that I supported the 25-basis-point increase in the federal funds rate at the December FOMC meeting. With this move, I think the Committee has likely come close to achieving a neutral policy stance—one that is neither providing accommodation nor is being restrictive and attempting to actively slow the economy.”

He views the “market turmoil”  as “a symptom of the various concerns and uncertainties surrounding the outlook. These include slowing global growth, uncertain trade policy, worries over the trajectory of growth domestically, and concern regarding the expected stance of monetary policy.”

And he too, along with other Fed governors, including Powell, pointed at the conflicting messages from the “recent upheaval in financial markets” and solid economic data:

So grassroots intelligence from Main Street and messages from Wall Street indicate heightened uncertainty and concern about the economy. But the aggregate economic data continue to paint a robust picture. What is a policymaker to conclude from these mixed signals?

To me, the appropriate response is to be patient in adjusting the stance of policy and to wait for greater clarity about the direction of the economy and the risks to the outlook.

Should conditions play out along my baseline outlook, I see little need to engage in restrictive monetary policy and push the federal funds rate above a neutral stance.

Voila, let the dust settle for a few months, then maybe raise the rate to neutral and wait.

Chicago Fed President Charles Evans, a voting member of the FOMC this year, used the word “wait” in his speech today, as in: “we have good capacity to wait.” Then he laid out his reasons for up to three rate hikes, starting somewhere mid-year.

He is gung-ho about the economy, sees “solid fundamentals,” and expects “growth coming in somewhat above potential.” But it just won’t be quite as strong as 2018. “Nonetheless, such growth in 2019 would come with healthy gains in household and business spending, keep the unemployment rate low, and have wages rising at a decent clip.”

He adds the unusual observation that financial markets “have been, well, shall we say, busy”:

“Investors seem to be concerned about these international and fiscal risks, the sustainability of corporate earnings growth in an environment with such risks, and the possibility of the Fed removing policy accommodation too aggressively.”

And he noted that the financial markets’ reactions combined “amount to a tightening in financial conditions.”

Tightening “financial conditions” is what the Fed had set out to do when it embarked on its rate-hike cycle in an era when financial conditions had been ultra-loose. It just took a while. But it shows that the Fed is finally getting closer to its goal. So he added:

“If the downside risks dissipate and the fundamentals continue to be strong, I expect that eventually the fed funds rate will rise a touch above its neutral level — say, up to a range between 3 and 3-1/4 percent.”

The Fed would have to hike its target range three times a quarter point to bring the range to Evans’ projection. This would be a slight tightening, given that the median neutral level at the December meeting was 2.75%.

But, maybe not in the first half:

“Because inflation is not showing any meaningful sign of heading above 2 percent in a way that would be inconsistent with our symmetric inflation objective, I feel we have good capacity to wait and carefully take stock of the incoming data and other developments.”

“I think developments in the first half of 2019 will be very important for making this assessment of our future monetary policy actions.”

St. Louis Fed President James Bullard, a voting member on the FOMC in 2019, confirmed once again in an interview published today that he is always dead-set against any kind of rate hike, has been from day one, and will be for all days to come. He confirms this every time anyone listens to him. So, nothing has changed – except this year he gets to vote.

Boston Fed President Eric Rosengren, a voting member on the FOMC in 2019, also highlighted in a speech today the conflicting messages of the economic data and the financial markets:

“At least to date, the economic data and the outlook of forecasters have both been more optimistic than recent financial market movements might indicate.”

He suspects financial market sentiment “may have become unduly pessimistic.” His own view is for growth in 2019 “solid enough to tighten the U.S. labor market somewhat.” But given the disconnect between market volatility and economic forecasts, he said, “I believe we can wait for greater clarity before adjusting policy.” And his “current expectation is that the more optimistic view will prevail, with economic outcomes consistent with the more upbeat forecasts.”

So, talking up the markets, being patient in the first half to let markets adjust to the current monetary policy, and putting a rate hike or two on the front burner in the second half seems to be the theme. But all bets are off if something big breaks.

Wall Street’s hope for a dovish Fed may not be entirely fulfilled, it seems. ReadMy “Fed Hawk-O-Meter” Speaks

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  53 comments for “Rally in Stocks Takes Heat Off Fed, Now They Talk Rate Hikes Again, Market Expectation of a Rate Hike Spikes

  1. Lou Mannheim says:

    Don’t fight the Fed. Unless the Fed is fighting each other?

  2. MCH says:

    they need to do a rate hike at the next FOMC just to shock Wall Street. Why you ask? For the hell of it. What’s the point of being on the Fed board of governors if you can’t have some fun.

  3. 2banana says:

    When did the Fed mandate become inflating and propping up the stock market?

  4. KPL says:

    My guess is first rate hike, if at all, could be June 2019. As of now looks like QT is flying under the radar and is on auto-pilot.

    Also China seems to have to the rescue of the world with its loosening of monetary policy for now.

    • Stockolio says:

      China has been on non-stop QE for quite a few years… It went a step further and completely demolished the little deposit to loan ratio Chinese banks had just recently. Disney World Banking and pretty much a government runned Ponzi scheme at this point

      Wolf, you seem like a very busy guy but here’s a good thesis title…

      Deglobalisation And The Fall Of China:

      Automation, 3D Printing and the Brexit Effect

  5. Texas Pete says:

    This would suggest to me that if you missed the exit party in fall 2018, then why not stick it out for another few months (assuming you can accept the risk of a drop from China setback, etc., recognized in previous articles), yes?

    That said, the “selloff that will make your ears ring” from the WS Report resonates and makes me want to run off into a CD for a few quarters…

  6. Sporkfed says:

    As long as yields on Treasuries get driven down by demand , the Fed will keep tightening.

    • JZ says:

      Huh? Are you sure? Fed controls overnight or 7 day repos, AKA the money markets. The treasury has a whole spectrum of 3month to 30 years.
      The FED is the mother of all banks. The children banks make money by borrowing short (think deposit, overnight, 1 month) at low rate and lend to capital markets ( 5,10 30 years) at higher rate which are bench marked by 10 year treasury.
      If 10 year yield keep dropping and FED raise overnight, all banks will die and FED will be a bad mother that killed her children.

      • Jdog says:

        Banks should not be borrowing from the Fed to Capitalize. They should be dependent on savings from the public.

        • JZ says:

          What you are suggesting is that when public is poor, the banks can NOT lend so the rich can NOT create business or enjoy capital gains in market! The rich needs to get richer regardless of the status of the poor. If the poor has no money, use the FED.

  7. Harvey Cotton says:

    If you look at the dot plots of actual voting members of the Fed, you will see that they do not know how they will vote for one year to the next. To actually have market action on how Fed members will vote one or two years out is verily the frothiest of froth. You may as well price in red or black at the next spin of the roulette wheel. It is no more than a prop bet, like betting the over/under on the second half of a Super Bowl or who will score the first touchdown. Stoopid.

    • Iamafan says:

      Just be thankful that today, There Is An Alternative (as opposed to TINA).
      For Notes, the current yields have fell back to more or less where they used to be last April.
      But for Bills, they are chugging along. Where else can you get at least 2.4% of your money without taking much risk nowadays?

      The only question is why the Fed has raised rates (given the amount of debt we have) and how long will they last.

    • Jdog says:

      The problem is that every intervention has a negative consequence. It is what used to be know as the moral hazard. The more you stray from natural price discovery, the more you incentive you provide for irresponsible behavior.

      • JZ says:

        Who cares about moral in society. If I am the friend of the FED, I get rich. Let the society talk about responsibility and morality, I am busy collecting rent and capital gains.

        • Jdog says:

          Morals are derived from the experience of the consequences of stupid behavior. People who can only think in terms of the short run are doomed to re-experience the calamities of the past. The laws of mathematics and physics will not be denied. We are most certainly in the 4th turning.

  8. CoCosAB says:

    It’s funny in the end…

    QE & ZIRP caused the WS Market’s inflation – aka PONZI SCHEME – since 2009.

    UQE & NZIRP will naturally break the PONZI SCHEME and deflation will bring the FAKE Market’s isto reality land.

  9. Bill from Australia says:

    The Fed, the Fed , who the hell runs the U.S.A the government, or a private bank .Get a life, this not working. As seen from outside USA your in deep sh*t, there has to be a better system change now before its to late.Or is it to late?

    • Hugs says:

      Three-card Monte is played different in the US than most places. Stock-market-boom and debt-inflate-away start when US shuts down migration and levies big tariffs. I would guess the earliest would be after the Year-of-the-pig starts (2019-01-05). President Trump’s year (I’ve been told all men are pigs). Senator Schumer will get on board once it is clear domestic US investing is now the growth market (or the Senator will resign to spend more time with his family).

    • divya says:

      “Permit me to issue and control the money of a nation, and I care not who makes its laws!” – Rothschild

  10. KPL says:

    As far as I can tell Powell seems to be playing his cards well. Create a flutter (like auto-pilot, long way from neutral), soothe nerves (near neutral), get a hike in, soothe nerves (data dependent), throw some more crumbs to soothe markets if it gets nervous (not on auto-pilot, listening to markets), clear skies, get a hike in, rinse repeat! As long as markets only zigzag and not fall of the cliff this is most probably Powell’s playbook. I do not know what happens when the hike and roll-off starts really biting as in markets swooning or credit freezing. At this rate we would get what Wolf has been claiming all along… 50% or more down in few years…

    • Jdog says:

      They are hoping to boil the crabs slowly enough that they will not jump out of the pot…. Easier said than done…

  11. Layman’s Terms Translation: The Fed will continue its faithful service and deference to Wall Street come Hell or high water, because at the end of the day that is the Federal Reserve’s only real constituent barring a major overhaul of its charter.

  12. mark says:

    Ah, the Fed. Our unelected , private multi-millionaire banker rulers .

    (Ain’t “democracy” grand…..)

    • Wolf Richter says:

      Well, it’s a little more complex.

      The Federal Reserve System, of which Powell is Chairman, is an “independent agency” of the US government. All board members are appointed by the President and confirmed by the Senate. They’re employees of the US government. There are many such independent agencies of the US government:


      However, the 12 regional Federal Reserve Banks are private institutions, owned by the largest financial firms in their districts.

      • IdahoPotato says:

        “All board members are appointed by the President and confirmed by the Senate.”

        All multi-millionaires and billionaire grifters non pareil.

        Powell was with the Carlyle Group, that specializes in “leveraged buyouts”. Same difference.

        • Frugal in the Bay says:

          In other words, foxes watching the hen house.

        • Jdog says:

          “All board members are appointed by the President and confirmed by the Senate.”

          You may appoint our man A or our man B.. Just like our political elections, it is the appearance of accountability, when in fact none exists… Everything is dictated by the ruling elite.

        • Wolf Richter says:

          Hey, I wasn’t responding to the “multi-millionaire” part, but to the “democracy” part of mark’s comment :-]

      • wkevinw says:

        There are also quasi-governmental entities, such as “professional societies” that provide regulations, such as AMA, Water/Air/Land Environmental Societies (provide pollution standards that are referenced in the Federal Register), financial agencies, etc. These specifications/regulations have “force of law”.

        Whether something is technically “the government” is often fuzzy.

      • KPL says:

        “They’re employees of the US government.”

        Does it mean that they also do not get paid during this shutdown?

  13. RD Blakeslee says:

    ““This is an economy that, by all appearances, ought to be able to stand on its own, without much support, or accommodation, from monetary policy.”

    “… by all appearances …”

    Weasel words. Speaker gives himself an out to say “misleading” appearances at the time were at fault, not his policy.

  14. Atu says:

    A piece of paper on a desk is very patient.

    The recent ECB minutes point to where everyone was pointing, and also insinuate a delay in rate rises till end of 2019, which the press have taken the liberty of penning in 2020 for headlines. It’s ok though, because it’s fine to wait while being fed cash, or something like that… patience, let no virtue go unmonetised.

    The year of the pretend smile is upon us.

  15. Kenny Loggins says:

    Spinning plates.

    Will they give them a nudge or not?

    It depends what happens.

    But they do like to add some drama for the audience.

    Hide inflation while deflating the debt.
    Look out for the chaos swan.

  16. M says:

    I see many parallels between 1998 and 2018.

    In 1998, the economy had been growing for many years, the Fed was deep into a rate hiking cycle, and market sentiment was that the expansion was getting long in the tooth and valuations were stretched. In 1997-98, higher interest rates in the US led to a currency crisis in emerging markets and the Asian financial crisis of 1997-98. In late 1998, in response to weakening underlying economic data and a ~18% correction in the stock market, the Fed actually reversed course and cut rates 0.25%. Now reading news articles from late 1998, I see many market prognosticators were predicting the high probability of a recession and bear market in stocks starting in 1999 for exactly the same reasons people are saying today. It did not happen, and 1999 ended up seeing 20% gains in the S&P. History doesn’t always repeat, but it does rhyme. Thoughts?

    • Jdog says:

      The biggest difference I can see between then and now is that then the economy’s fondations were much better then. It was a time when we still had a substantial manufacturing base, accelerating productivity, and much lower debt levels. The problem at that time was extream overvaluation of equities, mostly in tech. Today we have massive amounts of debt, much of it invested in assets with no real market value. Much of the debt today has no assets behind it that can be liquidated even at reduced prices.

    • cd says:

      No reason SPX can’t try to reach new highs thru May, its trading 14.5 frwd pe….2020 is where a lot of rubber meets road, me thinks…

      could have first sell in may go away in a long time, pre qe I believe….

  17. Seen it all before, Bob says:

    Weren’t the interest rates before the Fed was born in the 1800’s between 5% and 8%? Free markets at work?

    Wall Street says let the free market reign, and I say let them have their wish.

  18. Eric says:

    The stock market relies on participation in the market. The market doesn’t support the economy nor accurately gauges the economy. In very simple terms there can be no winners without losers. The loose money and easy credit has totally destroyed any sense of real worth. The market now has a lot of businesses that stay a float by credit and stock buy backs. With so much money moving around in milliseconds it’s nearly impossible to time anything. This is probably why a news headline can send markets in either direction in near real time. People are attempting to get in and out of markets on the whim rather then any real fundamentals lol. I can tell you I’ve won and loss in trading and it’s all come from playing the game. The stock market is a gamble and with the many manipulators it’s more of a losing game then a winning one. I choose to invest in more solid real world things like small business that can be much easier to gauge as far as profits and earnings.

  19. Frugal in the Bay says:

    What happened with the US-China trade talks? The elites in both the US and China realized they had to keep this easy money party going. We obviously can’t share details with the plebs or they may realize how we screwed them.

    Workers of the world, unite. If only, Marx were alive today. He’d have a field day.

  20. HR01 says:


    What were we supposed to label the previous three years of glacial rate hikes. A whopping 200 basis points in thirty-six months and we’re still staring at NIRP.

    Same with QE. A mere $400B reduction in Fed balance sheet after ramping it by $3.8T?

    A nation of whiners.

    Show ’em how it’s supposed to be done and get back to hiking in half point increments. Now THAT would be entertaining.

  21. It would make more sense if they adopted a rate hike pace, of say 1% a year, whether they did four quarter points, or just raised once. They could satisfy both goals, patience and normalization. It would also give the markets better guidance. If the stock market drops without triggering a recession they have a real problem.

  22. raxadian says:

    If the FED says it expects grow this year only a tad less that 2018, that averages to two to three rate hikes this year. I am betting on three.

  23. sierra7 says:

    For the common person go grocery shopping now….this January….and cry your eyes out….shocking!
    The FED is blinking and the ordinary person is suffering. Get some guts!!

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