What To Expect From The Fed Tomorrow

On Wednesday afternoon at 2 p.m., the Federal Open Market Committee, a subgroup of the Federal Reserve, will release its economic projections for the next two years. The figures will include expected growth and inflation rates. In addition, the Fed will issue an official statement and address the press, disclosing the body's decision on whether or not to raise interest rates. Short-term rates have sat at near-zero levels since the financial crisis. We tapped the minds of two economic experts to get their thoughts ahead of the big day. JJ Kinehan, Chief Strategist at TD Ameritrade Kinehan expects to hear "more of the same from the Fed." He says that "they'll probably talk about how they're going to look at the numbers" and carefully consider the available data before making a decision on interest rates. According to Kinehan, it's still too early for a rate hike. Although the May retail sales report that came out last week was "very positive, it's still only one month." He thinks that the Fed will want to see more consistently strong consumer spending, which he calls the missing piece of the puzzle, before moving forward with a rate increase. On the bright side, he says, the housing market continues to perform well. Although housing starts for May were slightly fewer than expected, building permits numbers smashed expectations, increasing by 12 percent versus predictions of a 3.5 percent decline. Current data indicates a 56 percent chance of a 25bp increase in rates tomorrow, says Kinehan. The chance of a 25bp hike in July is 59 percent. Adam Sarhan, CEO of Sarhan Capital Sarhan predicts a "cautiously optimistic" attitude from the Fed tomorrow, as they know that "the market—both Main Street and Wall Street—is still fragile." He doesn't think that they will make any major moves to rock the boat just yet. He points to the Fed's dual mandate: to 1) maintain 2 percent annual inflation and 2) foster economic growth. With only two weeks left until the halfway point of 2015, Sarhan says that the Fed isn't meeting either goal adequately. If this is how it is with rates at zero, "how are things going to get better once they being to raise rates?" He highlights the fact that the eventual contractionary policy is unlikely to stop with just one rate hike. "When the Fed raises rates, they're looking to do so 5, 10, 15 times. So the question isn't just if the economy can survive one increase," but rather multiple. The one good macroeconomic signal that Sarhan sees is job growth, with 280,000 new employees added in May. With regard to the healthy housing market noted by Kinehan, Sarhan believes that prospective homeowners are simply rushing to lock in favorable mortgages before interest rates inevitably go up. Therefore, according to him, the strong numbers are artificially inflated. Regardless of what the Fed announces tomorrow, however, Sarhan is excited to see the market's reaction—"not just stocks, but currencies and commodities as well." The Fed began a two-day meeting today, and the U.S. dollar is up amid hopes of a positive outlook from the central bank.