Buy the Rumor, Sell the Hawk

June 14, 2017 - 5:43pm

 by Gary Wagner

As anticipated, at the conclusion of today’s FOMC policy meeting, the Federal Reserve announced that they would raise interest rates by 25 basis points (¼%) to take the Fed funds rate effectively between 1 and 1¼%.

As written in the Federal Reserve press release, “Effective June 15, 2017, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the Federal fund's rate in a target range of 1 to 1-1/4 percent, including overnight reverse repurchase operations.”

Another outcome of today’s FOMC meeting was the announcement that the Federal Reserve anticipates one more rate hike this year, resulting in a total of three rate hikes in 2017. This number meets expectations the Fed has previously set.

Chairwoman Yellen stated, "Our decision to make another gradual reduction in the amount of policy accommodation reflects the progress the economy has made and is expected to make toward maximum employment and price stability assigned to us by law."

It Will Be Like Watching Paint Dry

However, it was the information revealed in regards to the Fed’s plan to liquidate its assets sheet of $4.5 trillion that was the most revealing component of today’s announcement.

According to the Federal Reserve’s press release, “The Committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated. This program, which would gradually reduce the Federal Reserve’s securities holdings by decreasing reinvestment of principal payments from those securities, is described in the accompanying addendum to the Committee’s Policy Normalization Principles and Plans.”

In a news conference held immediately following the conclusion of today’s meeting, Chairwoman Janet Yellen referred to their plan to liquidate assets as being calm and orderly when she said the asset repurchase policy “will be like watching paint dry.”

The biggest surprise was the Fed’s timeline to begin implementing asset liquidation. To that end, Yellen commented that the “Balance sheet reduction could begin this year, and take a few years to complete.”

Market participants reacted as they bought the rumor and sold the hawk. This action can be seen in net pricing changes of gold and the U.S. dollar. Gold had been trading dramatically higher prior to the conclusion of today’s meeting.

This is likely a response to a tragic and violent incident in which a congressman was shot this morning. However, as of 415 Eastern Standard Time, gold futures are currently trading at $1261.20, down $7.40 on the day. The U.S. dollar, which had traded under dramatic pressure with the intraday low at 96.20, quickly recovered and after trading to 97.10 eventually settled at 96.90.

While today’s FOMC meeting concluded with policy implementation that was highly factored into the market, it was the new information that had the greatest influence on the financial markets. The pace and policies laid out by the Federal Reserve in regards to their asset liquidation program were much more aggressive than initially believed. Also, the fact that the Fed went on record stating that they had planned one more rate hike this year added to the hawkish tone.

As such, expect market participants to digest this morning’s information over the next few days. Based upon the Federal Reserve’s timeline to liquidate a portion of its $4.5 trillion balance sheet, the last thing it will be like is watching paint dry.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer

Sentiment Indicator:

Gold Forecast: Proper Action
We are currently flat, with no active trades.  We are waiting for our next signal to enter a trade. It was my belief that our best play today was a neutral stance. Now that the FOMC meeting has concluded we can look to see if gold prices form a base and bottom.
We were long gold from 1264. Last Tuesday we sent out a TRADE ALERT to move Stop below 1280* 
Leg 1  Long June gold at 1225.00  Out at 1260 for a profit of $35.00 or $3500 per contract
Leg 2  Long August gold at 1264.00  Out at 1278 for a profit of $14.00 or $1400 per contract
Total Profit on trade is $4900 per contract
Gold Market Forecast

Over the last couple of weeks we have been under the assumption that this month's FOMC meeting would result in an interest rate hike, and have the real possibility of extreme volatility. The assumption of volatility was based upon the belief that the fed would release more information about their asset liquidation program and timeline. 

That is precisely what market participants witnessed today is the Fed released detailed plans as well as a timetable for the implementation of asset liquidation policy commonly referred to as a stealth hike. After reviewing the timeline and policies the Fed has presented it is my take that there asset liquidation policy is extremely aggressive with potential to create additional volatility in the market.