The market has gone into suspended animation following a feeble bounce back from the very scary selloff of late August. Volatility in Chinese markets has more or less stabilized as Beijing aggressively tries to contain the runaway stock losses and currency turmoil. Now, all the attention has turned to what, if anything, the Federal Reserve will do on Sept. 17.
At this point, no action looks like the most likely outcome; continuing a policy of near 0 percent interest rates that's been in place since 2008. Stocks should celebrate the confirmation of a dovish Fed that, when signals are mixed, will prefer to keep the flow of cheap money going.
But the risk of a hawkish surprise and unexpected rate liftoff cannot be fully dismissed (the futures market puts the odds of this at just 28 percent), and that would no doubt send stocks careening lower. No wonder trading volume is drying up and activity is light heading into next week.
Quick context: Over the past year, the running expectation was that the first interest rate hike since 2006 would occur sometime in 2015 as the job market continues to heal and the business cycle expansion reaches full maturity (if not outright old age). The unemployment rate has fallen to 5.1 percent. The number of job openings is at a record high since the data started in 2000 amid ongoing signs of shortages of skilled labor. And the economy grew at a 3.7 percent annual rate in the second quarter.
Related: 5 Million Job Openings, So Why Can’t You Get Hired?
By historical standards, the beginning of a policy normalization is way overdue, with risks of financial bubbles, malinvestment and investor overconfidence building: Coming out of the 1990-1991 recession, rate hikes started with the unemployment rate at 6.6 percent. Coming out of the 2001 recession, rate hikes started with the unemployment rate at 5.6 percent.
Indeed, Cleveland Fed President Loretta Mester recently said the economy was "at or near full employment" — admitting one of the Fed's policy goals has been met even as interest rates remain at emergency levels.
More dovish Fed officials are worried about recent market turmoil, still-low inflation, the drag from a strong dollar and potential disinflationary effects from the economic slowdown in China and other emerging market economies. This chatter intensified in the wake of the Aug. 24 "Black Monday" selloff when the Dow Jones Industrial Average dropped more than 1,000 points at the open as blue-chip stalwarts like GE (GE) dropped 20 percent or more.
Given Fed Chair Janet Yellen’s oft-repeated claim of being data dependent, a "no hike" decision will be increasingly difficult to justify. JPMorgan's Michael Feroli quipped that "Yellen's labor market dashboard just blew a gasket" following the release of the job openings data shown here.