What Should You Watch Before the Next Fed Meeting? I’ll Tell You
With the recent Federal Reserve meeting concluded, many investors were disappointed that additional monetary stimulus was not initiated. I, for one, was not surprised at the lack of monetary stimulus at this meeting, because the conditions are not yet set for such a maneuver. However, economic data leading up to next month’s Federal Reserve meeting will be crucial in determining if additional monetary stimulus will be needed.
Recent economic data show that the economy in the U.S. has slowed down from the beginning of this year. The Federal Reserve has the tough task of juggling the economy and the spigot that is monetary stimulus. This has become even more difficult since the data have not been a complete disaster.
Since the Federal Reserve has enacted several bouts of monetary stimulus involving the first and second rounds of quantitative easing, plus “Operation Twist,” the Federal Reserve is now hesitant to take on further action, because the fear is that this might have only a limited impact on the market.
I agree with this line of thought. I believe that the Federal Reserve only has a limited amount of effect left for additional monetary stimulus before deleterious actions occur. The next two months of economic data, especially in the unemployment rate and non-farm job creation numbers, are crucial in determining where the Federal Reserve stands for monetary stimulus. Currently, a large number of market participants believe additional monetary stimulus will be enacted at the September 12–13 meeting of the Federal Reserve.
The real question is, if the jobs numbers come in flat or slightly above expectations, does this mean the Federal Reserve holds? I think it is possible that the market will be extremely disappointed and result in a selloff, especially in the gold market, if we get jobs numbers showing decent results (in excess of 130,000 each month), until the Federal Reserve meeting in September. Obviously, jobs numbers below 80,000 increase the odds of a new monetary stimulus plan and almost guarantee it.
Another date for investors to be on the watch for is the annual conference at Jackson Hole, Wyoming, ending September 1. At this meeting, the Federal Reserve chairman might indicate more details about his thoughts regarding additional monetary stimulus. This might set the stage for a new monetary stimulus announcement at the Federal Reserve meeting a couple of weeks after the conference. Additional economists and Federal Reserve governors will also be present at this conference; comments from these individuals might also need to taken into account.
The job of an investor is to weigh the risks and rewards. No one can predict the future, but we can be prepared for certain eventualities. As it stands, the economic data certainly point to additional monetary stimulus. However, one should be prepared for a non-event in next month’s Federal Reserve meeting. All the information will be presented to us through the economic data releases, and I would urge investors to adjust their portfolios accordingly.