The market expects The Fed to bail it out with an interest rate cut before the end of the year. The market thinks it will get a cut next month, but there is no guarantee it will get what it’s expecting. It will get a better idea of what to expect this week after Wednesday’s Fed Statement.
Fed future funds are predicting three rates cuts by the end of the year. Three cuts could be wishful thinking, but we could see significant turmoil in markets if the Fed doesn’t cut at least once before the end of July.
This week’s Fed Statement is on Wednesday @ 2p. Markets will be listening closely to Fed Chairman Jerome Powell’s statement for any hint of a dovish policy shift.
Here are five key topics you should be listening for if you’re following this week’s Fed meeting:
1. “Patience” Grasshopper
The Fed has been stressing a ‘patient’ approach to rates for some time now, but they’re expected to lighten up during this statement. No rate cut is expected at this meeting. Instead, the market is expecting the Fed to set the stage for a cut next month.
Look for a dovish lean to Powell’s statement. If he highlights difficulties facing the economy, it’s a good sign that the Fed is setting the stage for a cut next month.
2. “We will act as appropriate…”
During a press conference at the Chicago Fed in early June, Powell said that the Fed is, “closely monitoring the implications of these developments for the U.S. economic outlook and – as always – we will act as appropriate to sustain the expansion.“
This statement that got the market bullish on a cut. Let’s see if Powell reiterates the Fed’s willingness to intervene.
3. Dissension in The Ranks
Not all Fed Governors are on the same page. St. Louis Fed President James Bullard recently commented that he believes the market needs a cut ‘soon’, citing a steep economic slowdown and dropping inflation expectations.
Bullard is a voting member of the board, so his opinion counts. Pay attention to his comments relating to Wednesday’s meeting. If he voices any kinds of frustrations or disagreement with the Fed’s take, it could be an indication that the Fed is leaning towards taking a hands-off approach to rates.
4. How to Play The Fed Statement
Most experts are expecting this week’s meeting to be a put. The Fed is trying to keep markets stable while they ‘wait & see’ for another month, but the rate cut is already priced in. Whether the market is getting ahead of itself or not is irrelevant. The fact remains that the market is expecting a cut and it will throw a temper tantrum if it doesn’t get it.
If Powell’s statement doesn’t strike Wall Street as sufficiently dovish, it could trigger a market response. A bad reaction in markets could bolster the case for a rate cut when the Fed meets next month. However, it could be a rough ride for anyone holding equities in the meantime
FYI, markets aren’t very keen on Powell policy statements. Since he took over the top job there have been 10 meetings with the Board of Governors. The market declined in 9 of 10 sessions in which Powell made a statement.
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