CLOSE

Credit score, debt and income are all factors in getting a personal loan, and the requirements vary by lender. Here are 5 tips for getting a loan.
USA TODAY

Jittery investors pushed stocks up sharply higher Wednesday ahead of the Federal Reserve’s key decision today on interest rates.

The stock market has suffered a deep decline so far this month, with the broad Standard & Poor’s 500 stock index sinking 7.8 percent, its worst start to December since the Great Depression in 1931, according to Bespoke Investment Group. 

A big reason for the slide is a growing fear on Wall Street that the Fed, led by Chairman Jerome Powell, will make a policy mistake and hike interest rates too high and cause the economy to slow markedly.

In afternoon trading, the Dow Jones industrial average was up about 300 points, or 1.3 percent, leading up to the Fed’s decision at 2 p.m. ET. The S&P 500 and Nasdaq composite were also up more than 1 percent.

The mood on Wall Street has also turned darker due to signs of slowing growth around the globe, the fallout from the U.S.-China trade dispute and a decline of more than 35 percent in the price of U.S.-produced crude. All these factors are “screaming slowdown,” says Gary Kaltbaum, president of Kaltbaum Capital Management.

That’s why Wall Street is looking for the Fed to back off its plans of gradual increases in borrowing costs, which they have been saying is necessary to avoid a spike in inflation and an overheating economy.

Investment pros say the Fed decision will provide a road map for where rates might be headed in 2019 and could influence the direction of the Dow and 401(k) balances in the year ahead.

Here are the rate scenarios Wall Street is watching ahead of the Fed’s decision.

Consensus Call: Hike with ‘dovish” outlook

Most Wall Street pros expect the Fed, as it has signaled, to hike its key rate another quarter point to a range of 2.25 percent to 2.50 percent. This would be the fourth increase this year and ninth since late 2015.

While some worry that another rate increase might be one hike too many, the Fed could soften the blow with language in its policy statement and comments from Powell in a post-meeting press conference that suggest that it plans to slow — or even pause — its pace of rate increases in 2019. At its September meeting, the consensus of the central bank was for a hike in December and three more next year.

This scenario is dubbed a “dovish hike” by Wall Street pros.

“This means that we will not see a pattern of a quarter point hike every three months as we have in the past year,” says Hank Smith, co-chief investment officer at Haverford Trust told USA TODAY via email.

“In 2019,” he adds, “the Fed will hold off and be very data dependent. We may see one rate hike, but not four.”

Surprise Decision: No hike and a pause

Many market participants and even President Donald Trump has been warning the Fed not to hike rates at Wednesday’s meeting, citing the possible damage it will do to the economy. 

While Wall Street places low odds on the no hike scenario, if the Fed appears to side with the market pundits and the president, and it opts to stand pat on rates for now, citing an uncertain outlook for the global economy and recent turbulence in financial markets, the market reaction is difficult to predict.

More Money: How latest Fed rate decision affects rates on credit cards, mortgages, savings accounts

More Money: These 30 vehicles are the safest 2019 models, car-safety group IIHS says

More Money: 5 ways to boost your portfolio before 2019 even as the Dow tumbles

Markets might view the no-hike decision bullishly, as it would reduce the risk of a policy mistake by the Fed. On the other hand, it could also spook investors as it could send a message that the central bank is more worried about the global slowdown than originally feared.

Investors agree with the president. More than six of 10 (61 percent) say the Fed should “stop raising rates” in the latest Wells Fargo/Gallup Investor and Retirement Optimism Index, up from 46 percent six months ago. Sixteen percent responding to the latest fourth-quarter survey said they are “very concerned” about the market’s recent bout of volatility.

Bearish outcome: hike plus more to come

The most bearish scenario would be if the Fed hikes rates again and signals that it is still on course to raise rates up to three times in 2019. 

“Markets will continue to look closely for hints on how high the Fed may push rates next year,” says LPL Research chief investment strategist John Lynch. “We still have faith in the Fed’s pragmatic evaluation of risks.”

Read or Share this story: https://www.usatoday.com/story/money/2018/12/19/fed-rate-decision-dow/2361052002/