05/31/2016
These Factors May Direct Fed’s Rate Decision

These Factors May Direct Fed’s Rate Decision

WTI Crude, Bent Crude, gold and equities in general have enjoyed strong rallies over the past three months. Recent hawkish comments from the Fed regarding the possibility of two rate hikes this year—one in June and one in December—have muddied the waters and made many wonder if the recent gains are sustainable with a rising dollar.

According to one Morgan Stanley official quoted recently in the Wall Street Journal, currency will have greater influence over the markets in the rest of 2016 than any other single factor. The recent commodities rally is something of a microcosm for what holds true in the rest of the market; because commodities prices are inversely correlated to the dollar, the weaking dollar has sent commodities and other risk assets skyward. Conversely, when the Fed raises rates and strengthens the dollar, it’s predicted that commodities prices, as well as global appetite for risk, will fall.

A Week of Big News

Although consumer confidence was shown to slip in May, consumer spending jumped 1% in April—the biggest jump in nearly 7 years. Last week, U.S. stocks closed out the week with the best 5-day gain since March. Although the S&P 500 and Dow Jones Industrial Average have both formed “double tops,” the telltale financial pattern preceding a big drop, all signs are pointing to the rate hike coming sooner rather than later.

The Lesson

The market is in a tough spot at the moment. With the Fed’s proclivity for flip-flopping, many traders are stuck wondering if each new economic announcement or report will send the Fed backtracking on their recent hawkish comments. As we’ve said before, a sound financial plan does not bet too heavily on one or two contingencies. Making decisions based on the day-to-day economic news is the quickest and surest way to squander gains and multiply your losses.

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