FOMC meeting preview: Is there still a “Fed put”?

Traders expect this week’s Fed meeting to be the proverbial “calm before the storm” of aggressive Fed tightening throughout the rest of the year - see what the possibilities are!

FED 3

On the face, this week’s FOMC meeting should be a non-event. After all, Fed Chairman Jerome Powell laid out the central bank’s timetable in unusually clear terms at his Senate confirmation hearing earlier this month, stating “As we move through this year … if things develop as expected, we’ll be normalizing policy, meaning we’re going to end our asset purchases in March, meaning we’ll be raising rates over the course of the year… At some point perhaps later this year we will start to allow the balance sheet to run off, and that’s just the road to normalizing policy.”

See our primer on everything you need to know about the Federal Reserve!

Not surprisingly, the market has priced these comments and others into its outlook, with fed funds futures traders expecting just about a 5% chance of a rate hike this week, but a full four interest rate increases by the end of the year, with an outside shot at five or six. In other words, traders expect this week’s Fed meeting to be the proverbial “calm before the storm” of aggressive Fed tightening throughout the rest of the year.

Will the Fed end QE early?

From a purely macroeconomic perspective, the central bank is arguably already behind the curve; after all, the unemployment rate is below 4% and inflation is running at multi-decade highs above 7%. Against that backdrop, why is the Fed still buying assets through its Quantitative Easing (QE) program at all, even if it is tapering those purchases fairly aggressively? Indeed, in that same confirmation hearing, Powell already admitted that the Fed is “…mindful the balance sheet is $9 trillion. It’s far above where it needs to be.”

While not our base case scenario, there’s absolutely a risk that the central bank’s views have evolved in recent weeks and that Jerome Powell and company opt to end all asset purchases immediately, rather than waiting until March. In that case, we could see a kneejerk reaction lower in risk assets like higher-yielding currencies and indices while safe haven assets like bonds and the US dollar could catch a bid.

See our article on Chairman Powell and his position as the head of the Federal Reserve!

Where is the “Fed put”?

The “Fed put” refers to the tendency of the US central bank to ease monetary policy (or push back the timeline for tightening policy) in response to falling stock markets. While far from official, many investors believe that the Fed has an informal third mandate to ensure that stocks don’t fall too sharply due to monetary policy decisions.

However, in contrast to the current environment, many of the historical occasions when the Fed put reared its head coincided with fears that the US economy would slip into recession; instead, the predominant concern now is that the Fed will have to raise interest rates aggressively in response to inflation readings, perhaps slowing growth in the distant future. In other words, the Fed is likely not worried about an imminent recession, so the potential “Fed put” may be at a much lower levels in major indexes than we’re currently seeing, the ongoing correction notwithstanding.

What to expect from the Fed

Considering the above, the most likely scenario is that the Fed “sticks to the script,” leaving interest rates and the taper timeline unchanged. With some traders undoubtedly hoping that Chairman Powell will see stocks struggling and ride to the rescue with dovish comments, a steady-as-she-goes outcome from Wednesday’s monetary policy meeting could lead to another leg lower in risk-sensitive assets like commodity currencies and stocks. That said, any hints of delay or hesitancy on future interest rate increases could help support beaten-down risk assets, whereas an early end to QE could exacerbate the recent selloff.

Either way, traders will be hanging on every word from Fed Chairman Powell and the rest of the FOMC this Wednesday!

 

Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Open an Account