The Federal Reserve Board will be meeting today to discuss monetary policy. It interesting how the Financial news channels are highlighting the 2:00 announcement as a will they or won’t they event. But in our view, the outcome is clear.
The Federal Funds Futures market is telling us that the Federal Funds Rate will be increased by 25 basis points to 2.00%. The probability of this occurring is 96%, which is as close to a slam dunk as one could expect.
For those that do not know its purpose, the federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight, on an uncollateralized basis. It is important as it presents the basis for other important short-term rates like bank deposit rates, and floating rate loan. This rate has been on the rise since 2015 but has been rising in earnest since 2017.
The big question is, “will an increase in the Fed Funds Rate have an effect on stock prices?” Since we believe that this rate rise is fully discounted in the Futures Markets, we would think it is also incorporated into investors valuation models for equity prices. If this is the case, then equity prices should not react to the announcement of a rate rise. At the same time, those who want to take profits may use the rate rise as an excuse to take profits and sell some of their stocks.
In our June 7 article, we discussed how different techniques in technical analysis are giving conflicting signals in the short term price action of the S&P500. One is telling us that the price action from the January 2018 high was a correction and that another leg of a bull market is ahead of us. The other is telling us that the Fall from the January high to the January low is the first leg down in a correction. The price action since the February low is investors marketing time as they prepare for the next and more powerful leg down. We need to see a little more price action before we can comfortably say the price level of the S&P500 is accelerating higher or moving lower.