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!

How to trade with City Index

You can trade with City Index by following these four easy steps:

  1. Open an account, or log in if you’re already a customer 

    Open an account in the UK
    Open an account in Australia
    Open an account in Singapore

  2. Search for the company you want to trade in our award-winning platform 
  3. Choose your position and size, and your stop and limit levels 
  4. Place the trade

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.