Underlying Shifts

Markets like stability whether its economic, geopolitical or otherwise.  Stability helps buyers and sellers agree on the current and potential future values of a variety of financial and real estate assets, thus driving their prices.  As stability wanes, the spectrum of expected outcomes stretches, inviting a broader range of opinions about potential future values.

Last week, something shifted the perception of economic stability, coinciding with an uptick in U.S. equity market volatility.  Each day the CME Group publishes their FedWatch Tool which shows the expectations of a particular rate change happening based on future contracts prices. As recently as November 10th, the odds of a rate cut reached 70% but dropped to about 42% last Friday.  As of this writing, the odds were nearly 47%, less than a coin toss. 

The Federal Reserve’s Federal Open Market Committee makes its next Fed Funds Rate announcement on December 10^th.  With each passing day, the announcement’s influence on markets grows.  Add some uncertainty to the decision, and markets become more tumultuous.  What is driving the uncertainty? It seems to be the growing individual independence of the FOMC voters.  The central bank has been a relatively boring institution when it comes to monetary policy, with most votes unanimous or nearly so. 

Unanimity may be changing.  Four of the 12 voters seem to be leaning for a cut (including one who wants a 0.50% cut), five have argued rates are where they should be, while the remaining three have been less committal publicly.  Adding to the uncertainty is the expiring term of Chair Jerome Powell.  While the odds of his reappointment are not published anywhere, it’s reasonable to guess that they are zero.  This could be the beginning of a new era of monetary policy in America, one characterized less by group thinking than in previous iterations.  Should this sort of era materialize, it’s unclear how that will impact markets, but if the last week is any indication, a bumpier ride could be ahead.