It's Not Business as Usual – FOMC Meeting Begins

Quiet and subdued action is the underlining characteristic of the day, as market participants await the conclusion of this month’s Federal Open Market Committee (FOMC) meeting. Most analysts believe that the result will be interest rates that remain steady and fixed at their current rate. Some analysts have described today’s atmosphere as defensive, as traders and investors wait for insight and knowledge at the conclusion of the Fed meeting tomorrow.

First and foremost, market participants are hoping to gain knowledge as to when the next rate hike will be initiated. Current thought is that a June rate hike is a likely scenario. However, there is a new wildcard that the Fed will throw into the mix. That wildcard is the Federal Reserve’s assets and their plan to begin to liquidate a portion of their balance sheet.

A Stealth Rate Hike

The liquidation of Federal Reserve assets, commonly referred to as a stealth rate hike, is a major topic on the calendar of issues to be discussed at this month’s meeting. Janet Yellen has gone on record by stating that any liquidation of government assets needs to be done in a defined and orderly manner so as not to create wild market fluctuations. The liquidation of Federal assets will be a new action by the Federal Reserve, and therefore contains uncertainty, as well as an unknown outcome.

Asset liquidation by the Fed will have the same effect as the raising of interest rates. However, the strength of the effect will not be known until liquidation begins and analysts can gauge and quantify the effect of the move. Because of that, the initial liquidation of assets by the Federal Reserve will lack transparency. Market participants will not have immediate ability to gauge how much interest rates will rise until the asset liquidation works its way through the free-market.

Tomorrow’s statements will hopefully provide clarity not only as to the next rate hike but also the schedule of asset liquidation. As the change of the new supply and demand parameters becomes evident in the new pricing, market participants will begin to see the net effect in a quantifiable manner. It is for that reason that it is not business as usual at this month’s FOMC meeting.

Wishing you as always, good trading,