Why the Fed Just Shocked The Market

If you look at the Dow’s performance today, something moved the market in a big way right around 2:00 PM EST. The major indices started the trading day on a strong foot, trending higher through mid-afternoon when something clearly spooked investors. In a matter of minutes, the gains from the day were wiped out. What happened to cause such a commotion on Wall Street?

Well, this afternoon the Federal Open Market Committee (FOMC) unveiled its latest policy decision regarding its ongoing low interest rate policy. In light of recent economic reports, some members of the Fed think that a rate hike in June is now more likely.

However, a June rate hike won’t happen unless a few conditions are met. For starters, annual inflation will need to hit the Fed’s target of 2.0%. And we’re not quite there yet. This past Tuesday, the Department of Labor announced that consumer prices (CPI) rose 0.4% in April, in line with expectations. Meanwhile, the core CPI (which excludes food and energy) climbed 0.2%. Consumer prices have risen just 1.1% over the past year.

Second, the Fed will need to see that the jobs market is continuing to improve. Lately, it seems like that goal has been slipping away. As I mentioned a few weeks ago, job growth is decelerating, and the labor force participation rate remains at well below pre-recession levels.

Finally, a June rate hike all depends on what the economy as a whole is doing. We just learned that economic growth slowed to 0.5% in the first quarter, which was well below the 1.4% growth we saw in the fourth quarter. Right now, slow inventory growth, lower exports and reduced federal government spending are dragging down the U.S. economy. We’ll have to wait until the end of July before we get an idea of how the economy has been doing in the second quarter.

So while more in the Fed appear to favor increasing rates, I consider today’s selloff an overreaction. Based on the current data, I expect the Fed to either raise rates in a "one and done" deal, or not raise rates at all in 2016. In either event, I’ll continue to keep a close watch on these signals and report back to you in this daily blog.


Signed Louis Navellier

Louis Navellier

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