Investors in 'patient panic' over Fed language

Sun Mar 15, 2015 1:23pm EDT
 
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By Sinead Carew

(Reuters) - Forget the 2013 "taper tantrum."

U.S. stock markets are in the midst of a "'patient' panic" ahead of Wednesday's Federal Reserve statement, when many investors expect a change in the Fed's language that would send the clearest signal yet that a rate hike is coming soon.

The S&P 500 has fallen 2.6 percent since February's stronger-than-expected jobs report a week ago boosted expectations for an interest rate increase as soon as June.

Stocks may fall further if Fed Chair Janet Yellen drops a pledge to be "patient" about rate hikes in the Fed's statement after the upcoming policy meeting. Most economists expect her to erase that word as a precursor to starting rate hikes in June, according to a Reuters Poll.

Fed fund futures contracts, however, show futures traders still expect the first increase in September, putting just 19 percent odds on a June rate hike, compared with a 58 percent probability for September, according to CME Group FedWatch.

With inflation still low, many stock investors are still not ready for a June hike. This may change Wednesday, said Torsten Slok, chief international economist for Deutsche Bank Services in New York.

"Next week if she does remove 'patient' they could get the wake-up call," said Slok, who sees stocks selling off further in what he calls the "patient panic."

Some strategists see the market's decline as a short-lived speed bump because the strength of the U.S. economy that would trigger a rate hike will ultimately help drive stocks up.   Continued...

 
U.S. Federal Reserve Chair Janet Yellen testifies before a House Financial Services Committee hearing to receive the semi-annual report on Monetary Policy and State of the Economy, on Capitol Hill in Washington February 25, 2015. REUTERS/Jim Bourg