In short, the realistic answer would be, “No one knows” and that includes the very people at the heart of the question, the FOMC voting members and the Fed Chair, Janet Yellen.
Sometimes, it becomes far too convenient to get swayed by the larger market emotions. But the truth is that markets can be irrational, even at times when you/we believe the markets are acting logically. And good evidence to this fact comes from the Dollar Index chart below. Notice the market reactions to both the FOMC statements as well as the minutes that follow, since the famed QE3 was ended in October 2014.
While in the very short term the FOMC’s communications, be it either the FOMC statements or the minutes might be considered dovish, within the larger perspective, the overall trend has continued to remain steady in an upward trajectory, while the bond markets, especially the 10-year treasury has been in a steady downtrend and that says a lot.
At the heart of the debate is the question as to when the Fed is likely to start hiking interest rates, and the markets in particular seem to be very obsessed with this fact; which is the timing of the interest rates rather than accepting the fact that interest rates will rise.
Early into this year, the markets were expecting a rate hike in March/April, a view that was further shifted down the road to a June consensus.
The Fed, for its part has been consistent in noting that the interest rate hikes would start based on data and this view was further reiterated by yesterday’s speech to the Senate Banking committee from the Fed Chief. This has been the same approach used by the Fed even during when the QE taper was announced.
In all honesty, being the center of the debate doesn’t necessarily mean that the Fed has access to economic data that the general market participants do not have. On the contrary, what we as investors/traders see, is what the Fed sees too albeit in a bit more detailed approach.
So far, we do have a robust growth in the labor markets, with inflation playing spoil sport, on account of falling crude oil prices, which however does lend support to the overall GDP of the economy. It is essential to understand that interest rate is a monetary policy tool used by central banks. Rates are hiked when the economy starts to overheat and consumers spend more and thus demand picks up in the economy which in turn results in prices rising. Conversely, interest rates are cut when consumers scale back on their spending and the lack of demand results in falling prices.
Bearing this simple fact in mind and applying it to the current market dynamics, we notice that while jobs have picked up (which indirectly results in more consumer spending) the level of spending has been mostly subdued. In other words, there is not enough demand in the market to warrant an increase in prices, and that could be for many different reasons (including Oil prices). But it would only be a matter of time before demand, fuelled by consumer spending starts to speed up the wheels of the economy as the current Zero interest rate policy continues to help support the economy at large.
So, in short, while it would be hard to pinpoint as to when the Fed will hike interest rates, the longer term charts definitely show that the markets at large continue to remain bullish for a rate hike that will come sooner than later.
