The U.S. markets did an about-face at about 2:00 p.m. today, following the release of the July Federal Open Market Committee (FOMC) meeting minutes. Both the S&P 500 and Dow are up slightly after spending the better part of the day in the red.
What’s interesting is that nothing new came out of the July minutes. According to the minutes, FOMC officials are still split down the middle.
Several officials are now more optimistic about the U.S. economy. The recent jobs report, which showed 255,000 jobs were created in July, has recently added fuel to that fire. In fact, many Fed watchers believe that an interest rate hike is growing more likely for September.
However, inflation remains relatively non-existent—and several Fed officials noted in the July minutes that they are waiting for inflation to materialize. Last week’s Producer Price Index (PPI) report showed that PPI has increased only 0.8% in the past 12 months. So the Fed isn’t fighting any inflationary pressures right now.
Clearly, the FOMC remains divided—and investors are cheering that division this afternoon.
Wall Street is now betting that key interest rates will remain low for the foreseeable future. Market expectations for a September interest rate increase is still sitting at 18%. And Federal-fund futures are only signaling a 50% chance of an interest rate hike by the end of the year.
Personally, I’m not expecting a key interest rate increase in September. On top of a still struggling U.S. economy, we’re in the heart of a Presidential election year. The Fed never wants to get involved in the national economic debate. And given all the uncertainty surrounding this year’s Presidential election, I look for the Fed to shy away from the spotlight as much as possible.
In fact, I fully expect Fed Chair Janet Yellen’s speech in Jackson Hole on August 26 to further clarify that the Fed is not ready to raise interest rates. Look for mixed economic news and the Presidential election to be cited as reasons for standing pat until at least December.