After seven years at zero interests rates and more than a decade since the last rate hike, Fed chief Janet Yellen believes today is the lift-off day.
As I wrote yesterday, it’s not a matter of changing the rate on a bunch of loans going forward. The Fed needs to extract roughly $800 billion out of the economy to force the Fed Funds Rate up that quarter point. And doing this at a time when liquidity is at its lowest due to the beginning of the end of year settlements across the board.
That’s the reason why we may see fireworks in the stocks and/or bond markets. Is there a small corner of the market so far unseen — like corporate junk bonds — which will choke on this liquidity squeeze? There’s no way of knowing until Thursday or Friday.
And what about the 30% of trading floors and financial advisers who have never seen a 0.25% Fed Funds Rate?
Equity markets have been staging a pre-Santa Claus rally since late Monday trading figuring “let’s bid’em up before we take’em down”.
So 2 PM EST the announcement comes with a 2:30 press conference, where chair Yellen will have to walk that balance beam between warning of a global economic slowdown and celebrating a “strong” US economy. Not ease to do, especially if you are not Nadia Comăneci.
She is a former Romanian gymnast, winner of three Olympic gold medals at the 1976 Summer Olympics in Montreal and the first female gymnast to be awarded a perfect score of 10 in an Olympic gymnastic event. When she was performing her balancing act the Fed rate was 7.25%, so at least there was a net under then Fed chief Arthur Burns.
So let me go out on a limb, since there’s no use fighting the Fed. I’ve said there would be not hike this year. What if the Fed went up 0.15% instead of the quarter point?
It’s less liquidity that needs to be drained, but it moves the needle. Just something to think about until 2 PM.