Jay Powell may have many economic variables to take into account before he and the Federal Open Market Committee pull the trigger on an expected interest rate rise later today, but one in particular — the US stock market — is having its worst performance ahead of a rate rise in decades.
To the close on December 18, the S&P 500 has dropped 6.5 per cent over the 30 sessions leading in to today’s FOMC meeting. Should the Fed tighten policy, as expected, later today it makes this the benchmark’s worst performance a month out from a rate rise since May 1987, according to analysis by the Financial Times.
The Fed raised rates twice more that year (for a total of 1.25 percentage points spread across four increases), before cutting them sharply in October in response to the Black Monday crash.
Even from a medium term point of view, the signal from the market looks frail. The 3.9 per cent slide over the 90 sessions to today would be the S&P 500’s worst performance three months out from a rate rise since the 6.2 per cent drop leading up the Fed’s June 2018 meeting, which was the worst showing since late 1999.
While the Fed is still widely expected this afternoon to raise interest rates for a fourth time this year, it faces a delicate balancing act conveying an upbeat assessment of the US economy while acknowledging concerns that higher longer-term Treasury yields, among other issues, have rattled financial markets in recenet weeks.
Wall Street’s performance is worrisome in light of the old trading adage that the stock market anticipates the real economy by, say, six months or so. Similarly, the so-called wealth effect that rising asset markets can have on aggregate consumption could be stymied if stocks remain soggy or, worse, sell off further.
US President Donald Trump, who has been critical of the Fed’s rate tightening cycle, has already seized on the recent market sell-off as a reason for policymakers to hold off on another increase today. He urged the central bank via Twitter on Tuesday to “feel the market” and not “make yet another mistake”.
It is unorthodox for a sitting president to comment on Fed policy and Mr Powell has repeatedly said the US central bank is independent of politics and its focus is on keeping unemployment low and prices stable.
But not for the first time in its history, the bank is faced with a dilemma. If the Fed pushes through today with a rate rise and sticks to its forecast pace for next year, it might run the risk of throttling the economy. But if it acts cautiously by tempering its interest rate path for 2019 or abstaining altogether from tightening policy today, this could give the impression the US economy is not as strong as previously thought, thereby spooking investors.
As it stands, the S&P 500 is already down 7.8 per cent December-to-date, lining the benchmark up for its worst monthly performance since May 2010 and its biggest December drop since 1931. An adverse market reaction to the Fed’s policy outlook would just about seal the deal on this being the market’s worst year since the financial crisis.