TLT•US indexes advance with Dow out front, marginally
Materials lead S&P 500 sectors, real estate lags most
STOXX falls ~0.2%
Dollar edges down; U.S. crude rises; gold up ~0.9%, bitcoin ~flat
US 10-year Treasury yields edge up to ~4.798%
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While traders are pricing in a high probability that the Federal Reserve will raise interest rates in September, there's no doubt that the proximity of this month's and next month's meetings to November's U.S. midterm elections is on the minds of policy officials and investors.
The topic is particularly interesting this year because investors have been anxious about Fed independence since President Donald Trump advocated publicly and frequently for the Fed to cut rates ahead of Kevin Warsh's replacement of Jerome Powell as the central bank's chair.
When Warsh appeared to signal that a rate hike was coming in Jackson Hole last month, TD Securities research strategist Molly Brooks said investors were relieved as they started to view the Fed as "more credible on the inflation front."
Brooks took a look at the history behind the central bank's decisions in election years and found that election years tend to not be correlated with more or less Fed actions.
In past years, 70% of meetings closest to Election Day resulted in a hold, while 30% resulted in either a hike or cut. And in non-election years, 76% of decisions were holds, while 24% resulted in changes, according to the strategist.
"This small difference does not show a significant deviation in Fed policy based on elections," said Brooks.
Looking back at economic data, she notes that positive data tends to increase going into the fall while summer data tends to surprise to the downside. So if "we start to see surprises drift positively, this could lead to a market that is concerned around labor market re-acceleration."
Fed actions tend to be most frequent in October, December and February, because of seasonal data surprises, with Fed actions in the fall being "more likely to be data-driven rather than politically driven," Brooks said.
"Choosing not to hike due to political concerns over the midterms would likely actually push long-end rates and inflation swaps higher if the Fed is viewed as political and unwilling to raise rates to tackle inflation," the strategist wrote.
So if the market continues to price in nearly a full hike by the October meeting, without further guidance and the Fed keeps holding rates instead, "investors could be led to believe a Fed hold was political if Warsh does not provide an adequate explanation in the presser," said Brooks.
But she says that Fed commentary is likely to increase in September, which "could provide enough information to move pricing before the meeting."
(Sinéad Carew)
