Waiting on Words from the Fed
Today marks the first day of the Federal Open Market Committee meeting otherwise known as the FOMC, which will conclude on Wednesday. As with all FOMC meetings it is the release of the statement as well as a press conference held by Fed Chairman Jerome Powell that traders and market participants will anxiously await. Although it is highly anticipated that the Federal Reserve will continue its current monetary policy and leave interest rates where they are, according to many analysts it is the word choices and nuances of what Powell says that will be of greatest interest.
According to MarketWatch, “Federal Reserve Chairman Jerome Powell faces a tough task on Wednesday, trying to steer clear of word choices that might kickoff a market overreaction, economists said. Making his life tougher is the fact that Wall Street is already unhappy with some of Powell’s recent communications efforts.”
Since the beginning of this year market participants have witnessed the Federal Reserve do a 180° turn and pivot as it revamped its monetary policy which contained consistent small incremental rate hikes and a balance sheet liquidation that was on autopilot, to a much more accommodative stance. As recently as December of last year the Fed laid out its plans for four rate hikes in 2019, and a continuation of monthly balance sheet liquidations.
Then in January for the first time in years the statement released immediately following the conclusion of the FOMC meeting did not contain the most recent “dot plot”. This was the first real indication that a tremendous change was about to occur in the monetary policy of the Federal Reserve. Since then the Fed has put a halt to any rate hikes this year, and penciled in only one rate hike for 2020. They also stated that they would begin to taper the balance sheet liquidation taking it off autopilot. The last Federal Reserve statement also indicated that the Fed would stop the liquidation of their assets in September.
Jerome Powell’s press conference is scheduled for Wednesday at 2:30 PM Eastern standard time and analysts as well as market participants will glean through his opening statement and answers to reporters’ questions during the press conference looking for subtle nuances in his word choice.
In essence the Fed Chairman must walk a tight rope, and according to Ellen Zentner, chief U.S. economist at Morgan Stanley, “If Powell sounds too optimistic, it might spark market concern the next move is a hike and if Powell presses the point that inflation is running low, he runs the risk of confirming market expectations that the next move is a cut and imply that that cut is not far in the offing.”
Wishing you, as always, good trading,