S&P 500: Fed Outlook is Stocks Positive

S&P 500: Fed Outlook is Stocks Positive

By Richard Cox

Recently the Fed made markets jump as they showed optimism about a rate hike coming soon in March. One problem being discussed is if the Fed waits too long if serious economic stimulus comes, that will be a poor time to increase rates. New York Fed President William Dudley said the rate hike case, “has become a lot more compelling” since the election of President Donald Trump and a Republican-controlled Congress.

Reuters reports, “John Williams, president of the San Francisco Fed, said that with the economy at full employment, inflation headed higher, and upside risks from potential tax cuts waiting in the wings, “I personally don’t see any need to delay” raising rates.”

Interest Rate Hikes

One advantage of raising rates in March is that it would allow the Fed to raise the interest rates possibly three times this year (which was an original goal). Limited interest rate hikes could send stock markets higher, and this would benefit bullish for those trading indices if it turns out to be the case.

Some other reasons for potential rate hikes include strong household spending, strong business confidence, and a massive increase in financial markets since President Trump’s election.

In the most recent Fed meeting, Yellen said it would be unwise to wait too long to increase rates. She said banks were on pace to increase rates before the summer. The consensus seems to be if inflation comes in on target and labor market reports are what they are expected to be, there will be a rate increase.

US Economy and Politics

The major variable hanging over the Fed with respect to a possible rate hike are new possible economic policies coming from the Republican-dominated House, Senate, and White House. In President Trump’s Joint Address to Congress, he called for wide-ranging tax cuts and infrastructure projects but did not dive into any specifics for these plans.

Another problem is not only what Trump plans to do with taxes and spending, but the repeal of Obamacare and the rollback of more financial regulations could impact the economy as well. The missing piece of the puzzle is not just what Trump plans to do, but first, if he will find the Congressional support he needs, and then on what timeline these actions will come into existence. Right now, the Fed is trying to ascertain this timeline and then they can better understand whether a March rate hike will be appropriate.

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