Well, folks, this was the moment we have been waiting for. This afternoon, the Federal Open Market Committee (FOMC) released the minutes for its latest meeting. As I mentioned yesterday, these minutes are a big deal because they provides key insights into the Fed’s interest rate policy going forward.
Judging from the latest minutes, the Fed doesn’t have any plans to change its current interest rate policy. That is, if the economy performs in line with expectations, the central bank will raise rates again in September. Currently, key interest rates are in a range of 1.75% and 2.0%.
An increase in September would mark the third hike of 2018. However, it’s becoming less likely that the Fed will raise rates after September. Another rate hike would depend on market rates, as well as what happens in Europe—particularly Turkey.
Right now, the collapse of the Turkish lira is a serious development, especially for Europe. The depreciation of the lira is expected to hurt European banks. That will likely cause the European Central Bank (ECB) to remain accommodative and to postpone any interest rate hikes until late 2019. And a more cautious ECB could rub off on the Federal Reserve, making any key interest rate increase past September even less likely.
Also, the Fed is currently forecasting a total of three rate hikes for 2018, indicating that the September hike would be this year’s last. Previously, during his first Congressional testimony, Fed Chair Jerome Powell had predicted that there would be four rate hikes for 2018.
Even if the Fed raises rates, it shouldn’t derail our momentum too much. Stocks remain the best game in town, even in a rising rate environment. This is because dividends are taxed at lower maximum rates than income from bonds. So the S&P 500’s almost 2% annual dividend yield should provide a floor under the stock market. As for my newsletter Buy Lists, we’re also well positioned in high-quality dividend stocks that are delivering robust sales and earnings growth.
None of this came as a huge shock to Wall Street. At the time of writing this, the benchmark indices are mixed. The Dow dipped slightly after the news, while the NASDAQ and S&P 500 trended higher. Meanwhile, the 10-year Treasury yield pulled back a few basis points at 2:00 PM EST, but it has since rebounded.
All is quiet on the Fed front for now, but I’ll continue monitoring the situation and will brief you on the latest Fed news in this daily blog.