December 16, 2018 / 1:01 PM / 6 months ago

RPT-Wall St Week Ahead-Wall St looks to Fed outlook Wednesday for early Christmas gift

 (Repeats with no change to text, adds link to Fed story)
    By Stephen Culp
    NEW YORK, Dec 14 (Reuters) - Investors are eager for a touch
of Christmas cheer from the U.S. Federal Reserve next week,
hoping for signs the central bank may ease up on interest rate
hikes next year and spark a Santa Claus rally.
    U.S. stocks are having their worst December performance in
16 years with the S&P 500 notching a 5 percent drop so
far this month. The Fed's ongoing reversal of easy-money policy
is a major overhang, and it is expected to raise rates more at
the end of its two-day meeting on Wednesday.
    That would mark a fourth consecutive December increase since
2015 when it started gradually lifting them. The question on
investors' minds is whether it could be the last.
    "It's imperative (the Fed releases) a dovish statement and
an accommodative Q&A session," said Bucky Hellwig, senior vice
president at BB&T Wealth Management in Birmingham, Alabama. "If
not, that would put stocks at risk again."
    "The Fed's the key to a strong December, and it's getting
late in the year."
    Recent comments from policymakers have fueled expectations
for a timeout signal when the rate-setting committee's statement
is released along with officials' individual projections for how
much further they will rise in 2019 and beyond.
    "The market's been under incredible pressure, concerned that
the Fed is just going to go charging ahead," said Stephen
Massocca, senior vice president at Wedbush Securities in San
Francisco. "The Fed understands that and from their latest
commentary they're starting to walk it back a little bit."
    U.S. markets have been highly sensitive to any hint that the
Fed is ready to slow down or even take a pause. The central bank
has lifted rates eight times since December 2015 in a bid to
restore them to normal after having slashed borrowing costs to
near zero to combat the financial crisis a decade ago.
    Last month, when Fed Chairman Jerome Powell said rates were
near the range of policymakers' estimates of "neutral" - the
level at which they neither stimulate nor impede the economy -
the S&P jumped by the most in eight months.
    "There's no doubt there's been a shift in sentiment towards
a more dovish Fed," said Charlie Ripley, senior market
strategist for Allianz Investment Management in Minneapolis. 
    Other FOMC members have recently weighed in. 
    Earlier this month, Fed Governor Lael Brainard nodded to
growing risks to growth overseas and in corporate debt markets
at home. St. Louis Federal Reserve President James Bullard
chimed in that investors were nervous that the Fed had gone too
    According to their latest projections in September, the
median view among policymakers was for three rate hikes in 2019.
Interest rate futures used to gauge the probability of further
hikes now reflect almost no chance of that happening.
    "If you look back at even as late as September, there were
probably three rate hikes priced in to 2019, where now there's
right around one," Ripley said.
    Some recent U.S. economic data, including an underwhelming
jobs report and tepid inflation numbers, along with pressures
such as the ongoing U.S.-China trade skirmish, also appear to
support an argument for a pause in Fed tightening in 2019.
    It is a mixed picture, though, as robust retail sales data
for November showed consumer spending remained on solid ground,
which could suggest no need for the Fed to let up.
    How the rest of December plays out likely comes down to how
Fed officials communicate their view of a complex economic
picture, said Oliver Pursche, vice chairman and chief market
strategist at Bruderman Asset Management in New York.
    "If you get a dovish-sounding (Fed) statement that stresses
the fact that the economy is good, but given that there's no
inflation to worry about we can take a pause, that could lead to
a 7 to 8 percent rally into year-end."

 (Reporting by Stephen Culp, additional reporting by Caroline
Valetkevitch, Charles Mikolajczak
Editing by Dan Burns and Richard Chang)
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