After spending all day in the green, at around 3:00 PM EST, the Dow, S&P 500 and NASDAQ abruptly changed course. The benchmark indices ended up finishing the day about 0.2% lower. The cause, of course, was the Federal Reserve’s big announcement about its interest rate policy.
Now, the good news is that the Fed kept the federal funds rate unchanged at between 0.25% and 0.50%. As I’ve written before, the current low interest rate policy draws fixed income investors to the stock market. And because rates here are still higher than other major markets around the world, foreign capital continues to flow into the U.S. markets.
So, what weighed on stocks after the announcement? Well, the Fed’s dovish rhetoric surprised some economists. While the Fed claimed that it was on track to raise rates two times this year, it didn’t even mention the possibility of a July increase. And, with the Presidential Election coming up, the Fed is under pressure to not raise rates until November, even.
What’s interesting is that the Fed has made an about face since its May meeting. If you remember, a month ago the Fed was hinting that a June rate hike was more likely than ever. At the time, I was skeptical, because inflation is nowhere near the Fed’s target, and the job market is still improving in fits and starts.
Since the May meeting, we received confirmation that the U.S. economy improved only a little during Q1. We also learned that just 38,000 jobs were created during May, the lowest level in five and a half years! Meanwhile, the trade gap continues to widen, and consumer confidence is waning. This doesn’t bode well for Q2 GDP.
This brings me to how the Fed’s comments really made investors nervous: The Fed lowered growth forecasts for both 2016 and 2017. And while the Fed expects to raise rates twice in 2016 and three times in 2017, not all Fed officials agree. Six of the 17 policymakers are calling for a one-and-done rate hike.
The bottom line is that not even the nation’s top economists and policymakers are quite sure about when to raise rates. This, coupled with the “Brexit” vote coming next week, has been weighing on stocks of late. I’ll continue to monitor both developments, and I’ll report any changes back to you as they develop.