The people at the Federal Reserve charged with fighting inflation and, one hopes, ensuring full employment, meet this week, and that could create a whole lot of volatility.
Wall Street analysts and traders get it in their heads about the Federal Open Market Committee, the Fed's rate-making body, will decide. And sometimes they're right.
Right now, the betting is on the Fed holding its key interest rate steady at 5.25% to 5.5% and signaling they'll leave the rate unchanged at their meeting on Oct. 31 and Nov. 1 and maybe their last meeting in December.
Because no one is supposed to know what the Fed will decide before 2 p.m. Wednesday, markets may be little changed on Monday and Tuesday.
What will Powell say?
The fun will begin when the Fed announces its rate decision and then, an hour later, when Fed Chairman Jerome Powell holds a news conference explaining the whys of the decision.
If Powell deviates at all from the expected thrust of the announcement and the expected path forwards, stock and bond prices will react. Ears will be intensely focused on whether Powell hints the Fed is done raising rates for now or may continue to boost rates.
If Powell says the Fed is done raising rates, expect stocks to rally. If he hints rates will move higher, it could get ugly.
The Fed has been raising rates since early 2022 because the central bank believed it had to step in forcefully to stop an eruption of inflation. Prices surged after the worst of the Covid-19 pandemic faded and demand for goods and services everywhere promptly shot up.
The 10-year Treasury yield pushed toward 4.5% this summer, and the rate on a 30-year mortgage topped 7%, hitting its highest levels since the end of 2001.
Stocks responded with a serious pullback in 2022. The Standard & Poor's Index (^IN) -) fell 33%.
Buying shot up again through the first half of 2023. In part because of huge gains for such shares as Nvidia (NVDA) -) and Tesla (TSLA) -), the Nasdaq-100 Index (^NDX) -) soared nearly 45% by mid-July.
But big-time profit taking and worries the Fed might not stop raising rates stalled the rally in August. The stall has continued in September. The S&P 500 is off 1.3% so far this month. The Nasdaq-100 is off nearly about 1.9%.
The market did get a nice bounce after chip-design company Arm Holdings went public on Wednesday. You may not have heard of the British company, but its designs, which are licensed to chip-makers, are widely used on just about everything, especially cell phones.
Risks to the market remain
Investor confidence is not robust. Barchart.com's daily report on the number of stocks hitting new highs and new lows has been negative for nearly all of 2023. Not surprisingly, small Nasdaq stocks are struggling the most.
A pause now may lead to a continued pause in November. A small rate increase could come in December, although the CME Group's FedWatch Tool is projecting the Fed still holding at 5.25% to 5.5%.
The CME tool is seeing rates starting to come down next spring. That could be because inflation really is falling hard or the economy is sagging.
There are other issues that the Fed and the Biden Administration will have to face.
A lengthy auto-workers strike against Ford Motor Co. (F) -), General Motors (GM) -) and Chrysler parent Stellantis (STLA) -) could depress economies where plants are located.
So, too, could a government shutdown, which the Republican-controlled House of Representatives is threatening.
Crude oil prices oil topped $90 a barrel this week. (Which explains why energy stocks have been the U.S. market's strongest sector over the last month.)
Gasoline prices were up to nearly a U.S. average $3.88 a gallon, up 21% on the year but down nearly 23% from the $5.02-a-gallon (U.S.) peak in June 2022.
The Ukraine-Russia War shows no signs of easing.
Higher mortgage rates are already depressing home sales and prices, reports say. Sales will climb if rates can come down.
That said, the U.S. banking system could be stressed by a possible a crash in commercial real estate values, especially for new office buildings that came online as the pandemic hit.
