With Low Probability for a Rate Hike, Follow the Money

Market participants and analysts have had the weekend to digest Friday’s job report and gauge what effect this data will have on the monetary policy of the Federal Reserve. Today we gained more insight as St. Louis Federal Reserve’s President James Bullard spoke in Nashville to the America’s Cotton Marketing Cooperative Conference.

In his speech, Bullard made it clear that he believes “the level of short-term interest rates is fine where it is for now.” Furthermore, he suggested a much longer timetable for the next interest rate hike, stating, “The current level of the policy rate is likely to remain appropriate over the near term.”

This is a departure from the original goals set forth by the Federal Reserve, in which they anticipated a total of three rate hikes this year. This is also in line with many analyst’s current belief that the Fed will be hard-pressed to initiate another rate hike in light of inflation remaining well below the central banks 2% target.

However, there is still a wildcard that contains the real potential for a rate hike this year; even if the Fed does not implement a third hike. This rate increase would take the form of a stealth rate hike. This rate increase would come in the form of asset liquidation by the Fed as they begin to unwind their massive $4.5 trillion balance sheet.

According to the Fed, the onset of this new monetary policy will begin “relatively soon.” Many analysts believe that the Fed will fill in more details, such as the timeline for initiation, as early as September’s FOMC meeting.

Analysts and market technicians will begin to “follow the money” once a clear-cut timetable complete with initiation date, monthly quotas for liquidation, and caps is available. What makes this type of rate hike much more dynamic than a defined fractional percent added to current Fed funds rates is that this liquidation, or unwinding of the Fed’s massive portfolio, comes with real uncertainty as to the overall impact and outcome it will have on current interest rates.

Although Bullard is not a voting member of the Fed, he is on record as stating that he projects “no additional Fed hikes through the end of 2019”. With the Fed on record saying that any changes to their current monetary policies would be data dependent, and the reality of inflation staying well under the 2% target of the Federal Reserve, it seems there is a low probability that they will implement a third rate hike this year.

For that reason, the greatest insight as to the future direction of the Fed might be by looking at their future asset liquidation policies and following the money.

Wishing you as always, good trading,