What will the Fed do next?

Wall Street's changing expectations about the Federal Reserve slowing down its rate and size of interest rate increases has caused the stock market to experience a rollercoaster ride.

Investors were briefly excited last week by the Fed acknowledging in its policy statement that it will consider the lag effect of all its rates hikes on economy before deciding what next. Jerome Powell, Fed Chair, shattered those hopes when he spoke about the Fed's continuing concern about inflation.

The problem is that investors pay too much attention and focus on Powell and Fed members' comments about the economy, instead of focusing on the numbers that actually show the economic performance.

The Fed is still dependent on data, which means it will base its policy decisions on the performance and inflation of the labor market, as well as consumer spending, among other factors.

Last Wednesday's speech by Powell came two days after the latest job report indicated that the US labor market remains quite healthy. These new figures must be considered when determining the rate of increase.

“The Fed continues to learn and adapt. It is data-driven. They don't know how much they will have to raise interest rates,” stated Mark Hamilton, chief investment officer at Hirtle Callaghan.

Investors, and, admittedly, members from the financial news media, have been obsessed with placing bets about what the Fed will do next.

Problems arise when Wall Street accepts that an outcome regarding interest rates is certain – especially when that consensus emerges weeks before a Fed meeting. There is so much that can happen and there are always new data and speeches from Fed policymakers to absorb and process.

Not words, but numbers

Christopher Smart, chief global strategist at Barings, stated that “there isn't a day when the market isn't overanalyzing the words from Powell or other Fed members.” But this world is extremely uncertain.”

This is why expectations of rate increases are always shifting, sometimes wildly. Take a look at the Fed Funds futures to see the central bank's next meeting scheduled for December 14.

Following a fourth consecutive rate increase of three-quarters percent last week, the Fed's key short term interest rate is currently at 3.75% to 4.4%

The market predicted that the Fed funds rate would rise to 4% to 4.255% in December one month ago. The market predicted that rates would rise to a range between 4.25% and 4.5%, and only about a 23.5% chance that rates would rise to between 4.5% or 4.75%.

After the Fed's recent hike and the Powell press conference, it is now almost 50-50 whether the Fed will raise rates by just half a point to 4.25%- 4.5% or by three quarters of a percent again to 4.5%-4.75%. There are no chances of a smaller rate hike.

Bottom line: Numbers are more important than words. Thursday's Consumer Price Index numbers for October inflation will be released. This data is more important than Fed speeches or volatile interest rate futures.

Powell and his coworkers are looking at the same numbers that the rest of us. Based on the most recent economic reports, the fed funds rates futures will continue to change.

Leo Grohowski is chief investment officer at BNY Mellon Wealth Management. He stated that “all of us in the market and those covering the markets must look at the data”

Unless the CPI report shows an increase in pricing pressures, it is likely that the Fed will continue to hold to its mantra of larger rate increases over a longer time period to squash inflation.

Silvercrest Asset Management's managing director Robert Teeter stated Monday in a report that CPI must deliver “decisively good” news regarding inflation “before the Fed ceases its high-stakes chicken game.”

Originally published on CNN.com