Published: Mon, September 18, 2017
Finance | By Loren Pratt

This Week: Housing starts, Fed meeting, CarMax earnings

With the USA economy growing fast enough to keep unemployment well below half its recession-era peak, the Fed is poised to be the first major central bank to begin pulling back from the final stage of emergency measures post-2008.

The CME Group's tracker of investor sentiment puts the likelihood of a rate hike by December at 57 percent.

The accompanying statement should flag that the recent spate of hurricanes will have caused some softness in the data, but that this will pass in due course and does not affect the overall path of policy towards a tighter position than hitherto. Northrop added $3.16, or 1.2 percent, to $270.19.

Greg McKenna, chief market strategist at AxiTrader, added that "traders continue to bet that the (Donald Trump) administration is refocusing on, and heading toward, some of the much-vaunted stimulus and tax cuts which were so much a part of the Trumponomics rally earlier this year".

The Fed's counterparts in Frankfurt and Tokyo will be among those watching the process most closely, given the potential ripple effects on their markets and economies, and the lessons to be learned from the USA experiment.

"In the short run financials will benefit", said Chad Morganlander, portfolio manager at Washington Crossing Advisors, if the Fed action pushes long-term rates higher relative to short-term rates.

There is general agreement among Fed officials that low inflation is transitory.

U.S. Treasury yields rose broadly on Monday. The iShares U.S. Aerospace & Defense exchange-traded fund has risen more than 20 percent this year.

James Rickards, attorney and finance commentator, in the Daily Reckoning blog ( said the current level of inflation, running below the Fed's 2% annual target, is partially tied to the increase in the deficit. In reality, their internal discussions are a matter of when, not if, the next hike will be.

Federal Reserve policymakers end their two-day meeting to review interest rates. The impact should be gradually absorbed. Lower rates promote growth. Coupled with the Fed's desire to raise the short-term fed funds rate, the potential detriment to the US economy is clear.

Next week's meeting is not expected to result in an interest rate increase, but investors will focus on how Fed Chair Janet Yellen characterizes recent inflation readings, for clues to the likelihood of a hike in December, as well as on how the USA central bank will begin to wind down its $4.5 trillion balance sheet.

As a result, market odds for a December hike jumped, with futures markets showing the probability above 54 percent on Friday, up from 31 percent the week before.

But with financial conditions supportive, the Fed's runoff will remain on "autopilot" unless there are "large adverse developments" that force adjustments, Fed Governor Lael Brainard said this month.

The Fed has been seen as a stable influence in recent years, but that could change.

If Fed Chair Janet Yellen gets her way, financial markets that had swung wildly with past shifts to the policy will barely shrug when the asset reduction begins, probably in October. Let's hope that confidence proves correct.

Like this: