All About The Fed Today

It’s all about The Fed today, with the two-day FOMC meeting concluding later this afternoon. While a majority of market participants see September as the date for the first interest rate increase, today’s meeting is expected to help shape expectations for post-September policy.

The Fed has been priming the markets for the start of the interest rate normalization process. The members have been telling us that the decision will be data-dependent, meaning The Fed will announce the first rate increase when it is comfortable with the U.S. economy’s growth trajectory.

We know that the U.S. economy was held back by weather and other transitory factors in the first quarter. But recent data has been showing that growth will resume in the current period, which has shaped the market’s expectations for September as the likely date for the first interest rate hike.

No major changes are expected in Fed policy in the statement coming out later this afternoon, but the statement will most likely show the economic picture as steadily improving. This will add to the market’s confidence in the September timeline for the first rate increase.

But even more significant than the post-meeting statement will be the FOMC members’ economic projections and the Chairwoman Janet Yellen’s press conference. Market participants will be looking for a sizing up of the tone and substance of Fed policy beyond the first rate increase.

The Fed has been saying repeatedly that it will remain gradual and patient in ‘normalizing’ policy, but market participants will be trying to handicap rate increases beyond the first rate increase through the committee members’ economic projections (the dot matrix) and the Yellen press conference.

Beyond The Fed, early Q2 earnings reports have started coming out. The FedEx (FDX) report this morning and the Adobe Systems (ADBE) report after the close on Tuesday both are for the May fiscal quarters, and both are on the weak side. We are still roughly three weeks away from a complete ramp-up of the reporting cycle. But estimates remain low, having fallen steadily over the last few months.

Total earnings for the S&P 500 index are expected to be down -7.2% on -6% lower revenues, with the Energy sector remaining the biggest drag on the aggregate growth picture, as was the case in Q1. Excluding the Energy sector, total Q2 earnings for the index would be essentially flat from the same period last year.

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