Thursday, January 28, 2016

Fed Powerless to Solve Current Stock Market Valuation Problem

On January 27, 2016, the Fed announced its decision not to raise interest rates.  The policy statement with the decision was considered slightly more dovish than when the Fed raised rates in December.  In particular the statement made reference to international market unrest which if continued would likely delay the ability of the Fed to raise rates as often in 2016 as previously forecast.  Post announcement, Fed Funds futures moved to a price which predicted only one additional rate hike in 2016.  And, the DOW (DIA), which initially traded up after the announcement due to a perceived more dovish stance by the Fed, ended the day down 223 points.

The only take away investors should have from the Fed statement is that they don't see any reason to raise rates - yet.  However, it is clear the FMOC does not anticipate lowering rates or using QE anytime soon.  Going slow is really their only option right now because the primary ingredient that will stoke inflation and tighten labor market conditions, the two mandated variables which dictate Fed policy, is still not strong enough, or even highly visible when it comes to inflation.  And what, you ask, is the primary ingredient?  Answer, a major change in U.S. fiscal policy.