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By Nicholas
Jasinski | Tuesday, May 3 Fed
on Deck. Stocks held
their ground today, ahead of tomorrow's conclusion of the Federal
Open Market Committee's May meeting and a highly anticipated
monetary policy decision. The Dow Jones Industrial Average
and Nasdaq Composite each ticked up 0.2%, while the S&P
500 added 0.4%. The Federal Reserve's interest
rate-setting body is overwhelmingly expected to approve a rate increase of
half a percentage point tomorrow, as the central bank eases off the
ultra-supportive stance it has held since the start of the Covid-19 pandemic. Futures-pricing data from CME
Group implies a 99% probability of such an outcome: a
Fed-Funds rate target range of 0.75% to 1.00%. It would be only the second
half-point rate hike this millennium, and the Fed won't be done there.
Current market pricing implies additional half-point hikes at both of the
FOMC's June and July meetings. By the end of 2022, the market expects a
Fed-Funds rate target range of 3.00% to 3.25%, per CME. Here's Stephen Stanley,
chief economist at Amherst Pierpont Securities: Many Fed officials, in fact just about all
of them except for the extreme hawks, have talked about a two-stage
tightening campaign. Stage One involves getting to around neutral, which the
median FOMC dot in March pegged at 2.375%, by the end of this year. Stage Two
would then involve cautiously pushing into restrictive territory in 2023
until inflation is brought under control. I am sympathetic to the idea that
the FOMC may be forced to get to neutral more quickly than they would
currently like. Clearly, the Committee has been compelled to speed things up
several times already this year, and if inflation fails to moderate over the
next several months, officials may need to recalibrate again. However,
at the current pricing, the financial markets may be a bit overly aggressive. You have to go back to the mid 1990s to find
the last time the Fed hiked rates by a half-point or more multiple times
during the course of a year. The central bank raised its target rate by a
total of 3 percentage points over seven meetings from early 1994 to early
1995. Before then, half-point or greater increases were most common in the
1980s, when the Fed was battling high inflation. Here we are again. The Fed will also likely announce the
beginning of its balance-sheet runoff tomorrow. It holds about $9
trillion of Treasuries and other securities on its books. The Fed hasn't been
adding to those holdings since March, but it has been replacing bonds that
mature to keep its total assets steady. The central bank may begin to effectively reduce
its holdings by not doing that anymore—a step short of outright selling
securities, but still incremental tightening. The FOMC's decision is out at 2 p.m. Eastern
Time tomorrow, and Chairman Jerome Powell's press conference begins half an
hour later. Also keeping economists busy tomorrow will
be ADP's private-sector employment report for April, released before the
market opens. That will serve as a preview of Friday's April jobs report.
That data release from the Bureau of Labor Statistics is
expected to show a gain of 375,000 nonfarm payrolls last month. That would be
down from the 431,000 jobs added in March. |
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DJIA: +0.20% to 33,128.79 The Hot Stock: Western
Digital +14.5% Best Sector: Energy +2.8% |
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