Stock Market Crash Alert: Mark Your Calendars for Dec. 13
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Stock market crash fears are elevated ahead of this week’s crucial rate-hike decision, due Wednesday, Dec. 13. Indeed, the Federal Reserve is expected to soon weigh in on growing speculation that it will cut interest rates in the near term.
What do you need to know about the Fed’s final policy meeting of the year?
Well, most economists expect the Fed to hold rates steady this week. In the face of seemingly easing inflation and a still red-hot labor market, it’s unlikely Powell and company will move to lower rates and risk inflation returning, nor levy another hike while recession fears are still top of mind.
As per the CME FedWatch Tool, interest rate traders are currently predicting a 98.4% probability that the Fed will opt to keep the benchmark rate at its same level, between 5.25 and 5.5%. They also predict a 1.6% chance the Fed increases rates 25 basis points to a range of 5.5% to 5.75%.
Perhaps reasonably so. As it stands, hopes have never been higher for the central bank to accomplish its long-shot “soft landing” scenario. That is, an outcome where inflation eases to the Fed’s 2% goal without incurring an economic downturn.
Released last Friday, the November jobs report showed that the labor market is still remarkably tight. Unemployment read 3.7% in November, even better than forecasts for 3.9%.
Meanwhile, October inflation data — also released last month — came out equally promising, showing 0% monthly change in the price level and just 3% annual inflation, per the Personal Consumption Expenditures (PCE) report.
Will a Hawkish Fed Push Investors to a Stock Market Crash?
The Fed is currently in something of a “goldilocks” scenario, where it’s clear that prices are coming down but that unemployment and spending are also in a much better place than where economists had predicted earlier in the year.
As such, while many investors are still hoping the Fed will soon consider cutting rates, they are likely to be disappointed. Much of the optimism behind the strong recent inflation reports is the underlying assumption that once inflation turns the corner, the central bank will lower rates in an effort to bolster the economy and hopefully avoid a potential recession. With inflation easing and unemployment still low, though, the Fed will likely take a hawkish stance this week.
“I think the market is a little too aggressive in terms of thinking that cuts are going to occur in March,” said Mike Sanders, Head of Fixed Income at Madison Investments. Sanders believes the Fed will “try their best to push back on the narrative of cuts coming very soon.”
Because of this, stocks may suffer as traders come to terms with the fact that the Fed may not lower rates as soon as they had hoped.
November CPI Looms Large Ahead of Fed Meeting
Interestingly, the November Consumer Price Index (CPI) inflation report releases on Tuesday, just one day before the Fed policy decision. According to Forbes, headline inflation is projected to come in flat month-over-month and 3% on an annual basis, a slight improvement from last month’s 3.2% CPI reading.
Meanwhile, core inflation — which excludes food and energy costs — is expected to come in surprisingly hot. Core CPI is estimated to increase 0.3% in November and 4% year-over-year (YOY). This is notably above the Fed’s 2% inflation goal.
That said, unless there’s a major inflation blowout, don’t expect the results to have much of an effect on the Fed policy decision this week.
“I don’t see any report on the horizon that would really make them [the Fed] change their stance on where we are on monetary policy,” NorthEnd Private Wealth Chief Investment Officer Alex McGrath told MarketWatch.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
