How to Trade the Fed News

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The decisions and statements that come out of the Federal Open Market Committee (FOMC) meetings are always closely watched. That is when changes in policy or interest rates are most likely to come, as the scheduled press conference that follows those end of quarter meetings gives the Fed Chair a chance to explain their decisions.

Today’s announcement and press conference will be even more closely watched because the outcome is uncertain.

The uncertainty isn't over interest rates. The expectation of a twenty-five-basis-point (one quarter of one percent) hike to the short-term interest rate controlled by the Fed, known as the Fed Funds rate, is so high that the market has for some time indicated an over ninety percent chance of that outcome. That is about as close to a certainty that you can get in financial markets.

What is uncertain is what the still new Fed Chair, Jerome Powell, will say regarding the future.

The general feeling here is that with unemployment below average at 3.8%, inflation nudging 2%, and an economy that is showing signs of increasing strength, there will be talk of an even tighter monetary policy in the coming months. All that said, a more hawkish Fed outlook is not as near as many seem to believe.

The role of Fed Chair is traditionally apolitical, but it is a political appointment nonetheless and in the modern polarized political environment that has become increasingly apparent. When, after the recession, Congress pursued a tighter fiscal policy than would have been favored by most Democrats, Janet Yellen emphasized the bank’s role of stimulating the economy, for example.

Now, with Trump’s appointee in charge, we have yet to find out if the committee’s decisions will be influenced by the pro-growth stance of the President.

Most see it as unlikely, but there is a chance that Powell will use the fact that the European Central Bank (ECB) is talking about moving towards tighter policy as a reason to keep some key parts of the outlook unchanged. If that is the case, the surprise effect would see stocks making strong gains.

If not, we could see some weakness. With a tighter monetary policy stance already priced in, it would seem logical that any negative reaction is likely to be somewhat muted and short-lived, but this may not be the case.

In some ways, reacting to this Fed meeting is hard for retail traders and investors. This is not really about something as concrete and obvious as a change in rates; it is all about reading into some subtle changes.

Should Powell announce, for example, that he will be holding press conferences after every monthly meeting in the foreseeable future, that seemingly innocent change would add to any downward move. The assumption is that, even if he says it is to provide more accountability and transparency or whatever, that would be a move designed to allow for more frequent hikes later this year.

On the other side of the coin, if there is any indication that the committee regards current interest rates as being in the “normal” rather than “accommodative” range, that would indicate that while one or two more tweaks are coming they are very aware that we are still in recovery mode and are wary of moving too far too fast. In that case, stocks would fly.

My instinct when I look at news-driven moves such as will happen today is to take a contrarian view. The tendency of markets to price things in advance then overreact to news makes fading the initial move successful more often than not. Today, that is not the case. Even though it looks on the surface that everyone knows what’s coming, there are lots of ways in which this announcement could set the tone for a long time to come.

That increases the chances of a sustained move, so the best strategy will be just to wait and see, and then follow the market’s lead.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: News Headlines , Central Bank , Economy , Stocks , US Markets

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Martin Tillier

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