Well, this should be fun. Fed Day is finally here and no one on Wall Street can seem to agree on what will happen.
So far, U.S. markets are playing it safe, with all stock indexes trading close flat. The Dow, S&P 500 and Nasdaq have all been bouncing between very small gains and losses on Thursday.
The real action should come at 2 pm ET when the Federal Reserve tells the world whether it will raise interest rates for the first time in nearly a decade. And then Fed chief Janet Yellen will explain the decision and offer hints on future policy during a televised press conference at 2:30 pm.
The outcome of these crucial events could have a big impact on stocks, bonds, currency and overseas markets not just on Thursday, but for months to come.
It’s “the most widely debated, dissected, analyzed and now traded capital markets event in my 25 years on the Street,” Nicholas Colas, chief market strategist at ConvergEx, wrote in a note to clients.
Even the ‘experts’ don’t know what’ll happen
The crazy thing is, despite all the analysis there remains great mystery over what the Fed should — and ultimately will — do.
Traders on Wall Street are betting against a rate hike on Thursday due to turbulence in financial markets created by global growth worries fueled by China. All you need to do is recall the unprecedented 1,000-point Dow plunge on August 24.
Many economists believe a rate bump may finally happen because labor markets have improved drastically and the Fed needs ammo (room to lower rates) for the next emergency.
It’s also possible the Fed opts for halfway measures, such as a mini rate hike or a very strong suggestion a hike will come in October.
“The bottom line is that nobody knows what’s about to happen…There are too many scenarios, and asset markets have been all over the place in the last few days,” Bespoke Investment Group wrote in a note to clients.
Would rate hike help or hurt stocks?
The stock market has been a big winner of the Fed’s emergency policies. Near-zero rates make risky assets like stocks more attractive than keeping cash in the bank, where it would earn nothing at all. So it stands to reason that stocks could react negatively to a rate hike.
But that may be shortsighted. After all, a rate hike would represent a vote of confidence in the state of the U.S. economy — and vice versa. A stronger economy is great for corporate profits and thus stocks.
At the same time, investors (and financial journalists) are tiring of the endless debate over Fed policy. It’s fueling uncertainty that markets hate.
“A decision to hike rates could spur a relief rally. They did it. It is behind us,” Marc Chandler, global head of currency strategy at Brown Brothers Harriman, wrote in a note to clients.
“A Fed rate hike that is not followed by the Apocalypse could go a long way toward bolstering confidence and the animal spirits,” Chandler wrote.