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Last week, the Federal Reserve spooked markets by preserving the monetary policy status quo. Yet a few central bank watchers were more surprised by a new idea the central bank seemingly suggested: a negative interest rate.
The Fed's closely watched "dot plot" revealed that at least one committee member floated the idea that a fed funds rate below zero might be an appropriate target for the remainder of this year and next.
The forecast is widely thought to be the work of Minneapolis Fed President Narayana Kocherlakota, a non-voting member of the committee who is known for his dovish views. In her press conference last week, Fed Chair Janet Yellen made clear that a negative federal funds rate "was not something that we considered very seriously at all today."
However, in an environment where prices are persistently low, negative rates mean that businesses and consumers are essentially paid to borrow money, which could serve as an important stimulative tool in times of crisis.
After all, the Fed has spent years noting that its benchmark rate is at the "zero lower bound," which forces it to take other actions in order to stimulate the economy, (i.e. purchase bonds) since rates can't be lowered any further.
Yet what if that bound is not a bound at all, but a Rubicon waiting to be crossed?
The big question on every investors mind this week is simple: Will she, or won't she?
Wall Street is ripe with anticipation as the countdown continues to what could be the most important Federal Reserve statement since the financial crisis. But while everyone seems to be weighing in on how the market will react if Fed Chair Janet Yellen decides to hike or not, one widely followed economist says it all comes down to her language.
"It really depends on what kind of guidance we get," Anthony Chan told CNBC's "Futures Now" on Tuesday. Chan, who is in the camp of a December rate hike, believes that if the Fed does indeed pass on September, it must make a "strong case" that the "fundamentals are improving and the only reason they decided to stop or pause is because of global volatility and some volatility here in the U.S.," in order for the market to react positively.
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The Federal Reserve may or may not elect to raise its target on the federal funds rate when it meets on Thursday. Yet either way, the much-anticipated decision is unlikely to have nearly as great an impact on the economy as it might have 30 years ago.
Such is the argument in a recently released paper from the Kansas City Fed, which posits that changes in financial markets and the American economy have reduced the import of changes to the interbank lending rate.
Before 1985, an unexpected 25 basis point cut in the federal funds rate would have led to a 0.2 percent increase in employment over the next two years, the study noted. But in the post-1994 period, the effect on employment is statistically insignificant, find Jonathan Willis and Guangye Cao of the Kansas City Fed.
This is obviously problematic, given that the Fed describes its ultra-low interest rate target as intended to "support continued progress toward maximum employment." If the impact of a shifting fed funds rate target on employment is indeed nil, then this strategy makes little sense.
Perhaps even more troubling, it means that the Fed's primary tool for helping the economy has been, at best, severely blunted.
While Wall Street frets about a potential Fed rate hike next week, one prominent economist has a simple message for investors: Relax. Nothing is going to happen.
"I would say in light of a variety of different events, most notably the fragility and volatility in the global equity markets, the Fed is most likely to pass on September," Joe LaVorgna said Thursday on CNBC's "Futures Now." Wild price swings have plagued U.S. equities in the past several weeks, as the market has grappled with heightened volatility.
But rather than push the decision to raise rates for the first time in nearly a decade back to the end of the year, LaVorgna—who believes the Fed missed a prime opportunity to hike in the spring—said it could come sooner than most market watchers think.
"They are going to view [the next month] as a way to see what, if any, negative fallout that the recent market events have had on the broader economy," said Deutsche Bank's chief U.S. economist. "I think October is interesting as a possibility for a hike, as the Fed could very well raise rates next month if economic and financial conditions warrant action."
The recent spurt in volatility has many market participants drawing comparisons to prior crashes. Now, one former bear claims the market is giving her déjà vu to the late 1990s, and that could mean higher stock prices ahead.
"In terms of the late '90s, there are certainly some echoes and interesting comparisons that we're following," Wells Fargo's institutional equity strategist, Gina Martin Adams, told CNBC's "Futures Now" on Tuesday.
In 1998 the S&P 500 fell more than 15 percent from July to October before resuming its advance and finishing the year with more than 20 percent returns. "We cannot help but note the similarities to the 1998 emerging market financial crisis, and note that it took Fed action to calm the market then," said Martin Adams. A highly anticipated Fed meeting kicks off next week as investors anxiously wait to see if Janet Yellen will hike interest rates.
For Martin Adams, when it comes to the market, the two most important similarities between the current environment and 1998 are the swift decline in crude oil coupled with a sharp rise in the dollar, and the common sector leaders.
"Right before the 1998 crisis in stocks and the broader financial market, we did have a 60 percent decline in oil prices and a roughly 30 percent rise in the dollar. That's about where we are now." In the last 12 months WTI crude oil prices have fallen more than 50 percent while the U.S. dollar index has risen 14 percent in the same period.
"It's no wonder why the S&P 500 is going through a pretty significant correction in response to the massive destruction in the currency and commodity markets," she continued. "This is a commodity led crisis."
The market turmoil continued Tuesday as weak data out of China pushed all major U.S. indices down more than 2 percent. The S&P 500, Dow Jones industrial average and Nasdaq composite have now fallen a respective 6.5, 9.5 and 1 percent year to date, and according to one renown technician, the move may have signaled the end of one of the longest-running bull markets in history.
Looking at a chart of the S&P 500, Louise Yamada noted that momentum has been declining for four months, which by her work, is a "classic" sell signal.
"This is suggesting to me that we are looking at a bear market," said Yamada said Tuesday on CNBC's "Futures Now." Yamada noted that the last two times the market saw a similar shift in momentum were in January 2008 and June 2000.
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