This was a pretty interesting release from the Federal Reserve, despite there being no press conference by Chair Janet Yellen.
The setup heading into the event was fairly benign: Faced with Brexit and only a mildly rebounding U.S. economy in the second quarter, all bets were on the Fed remaining rather dovish. That much was clearly evident in the fed futures market (rate hikes were pulled off the table for September) and the hardcore rally in stocks over the past month.
However, the Fed tossed the market a well-spun curveball on Wednesday. While the central bank didn't completely take away the punch bowl, it indeed set the stage for a September rate hike, which investors weren't anticipating today. As I have been saying, Corporate America may be front-running the Fed's next rate hike by announcing a series of mega deals (see Linear Technology (LLTC) , the proposed Mondelez (MDLZ) /Hershey (HSY) tie up, etc.).
Here are a couple of signs of a less-friendly Fed potentially emerging on the scene before the end of the year:
"Information received since the Federal Open Market Committee met in June indicates that the labor market strengthened and that economic activity has been expanding at a moderate rate. Job gains were strong in June following weak growth in May. On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months."
It looks as if the Fed is looking beyond the weak employment report of May, and keeping an overall perspective in mind. By its comments, I am left with the sense it expects labor market conditions to gain strength into the fall (so expect another solid report for July) and that rates will have to be hiked at least once this year. Doing nothing almost seems unacceptable, even when considering a rate hike would come during an election season.
"Near-term risks to the economic outlook have diminished."
One of the more hawkish aspects in the Fed's release was this new line in the statement relative to the June statement. I expect the market to slowly freak out over this utterance by the Fed as it could be backed up in coming weeks from various Fed speeches and then, the Fed minutes.
Although the market is never keen on hearing a less-friendly Fed is right around the corner (that is, unless inflation is running at 1980s levels), I think the biggest thing to be concerned about is the continued deflation in the U.S. economy. It's outright disturbing, but unsurprising to yours truly as countless execs I talk with are more focused on lowering prices to jumpstart weak sales as opposed to being in a position to raise prices because of overwhelming demand. Well, unless your name is Sprint (S) , which strongly signaled earlier in the week it will be looking to raise prices in coming months after spending months offering discounted plans. Verizon (VZ) here I come...