US STOCK markets are in the midst of a “patient panic” ahead of Wednesday’s Federal Reserve statement, when many investors expect a change in the Fed’s language that would send the clearest signal yet that a rate hike is coming soon.
The S&P 500 has fallen 2.6 per cent since February’s stronger-than-expected jobs report a week ago boosted expectations for an interest rate increase as soon as June.
Stocks may fall further if Fed chair Janet Yellen drops a pledge to be “patient” about rate hikes in the Fed’s statement after the upcoming policy meeting. Most economists expect her to erase that word as a precursor to starting rate hikes in June, according to a Reuters Poll.
Fed fund futures contracts, however, show futures traders still expect the first increase in September, putting just 19 per cent odds on a June rate hike, compared with a 58 per cent probability for September, according to CME Group FedWatch.
With inflation still low, many stock investors are still not ready for a June hike. This may change on Wednesday, said Torsten Slok, of Deutsche Bank Services in New York.
“If she does remove ‘patient’ they could get the wake-up call,” said Slok, who sees stocks selling off further in what he calls the “patient panic.”
Some strategists see the market’s decline as a short-lived speed bump because the strength of the US economy that would trigger a rate hike will ultimately help drive stocks up.
On Friday, the dollar reached its highest point against a basket of major currencies since April 2003.