Euro And U.S. Policy Uncertainty Is Unusually Divergent

The market isn’t expecting any drastic changes to U.S. monetary policy this week from the FOMC. Even if the Fed decides not to raise interest rates, the outlook for U.S. monetary policy and European monetary policy continues to diverge. Just last week, Europe cut its main interest rate to 0 percent, while the Federal Reserve’s last move (and most likely next move) was a modest hike.

When the Fed first raised rates back in December, the consensus market expectation was for four modest 0.25 percent hikes throughout 2016, but softening global economic conditions have likely put the next U.S. hike on hold, at least temporarily.

Although another rate hike is likely off the table this week, investors will be watching closely for other language from the Fed that could move U.S. markets. In January, the Fed admitted that “economic growth slowed late last year.” Investors will likely be looking for more positive language this time around.

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In addition, investors will be looking closely at any changes to the Fed’s interest rate forecast, even if no rate change is announced this month. Finally, investors will be looking to see if the bounce in energy prices has impacted the Fed’s inflation expectations.

The graph above, which was curated by Joe Brusuelas, chief economist of McGladrey using data from Stamford, shows the divergence in policy uncertainty between the U.S. and Europe. So far this year, the SPDR S&P 500 ETF Trust SPY is down 1.2 percent while the Vanguard FTSE Europe ETF VGK is down 4.1 percent.

Disclosure: the author holds no position in the stocks mentioned.