🚀Can the Fed push US indices to fresh all-time highs?
The FOMC meeting concludes with the decision released today in the evening at 7pm BST (8pm CET). This is intra-quarter meeting which means that no additional materials are released. We will get the statement with the decision and Powell post meeting conference will begin 30 minutes later.
What is the background?
The Fed support for the past 13 months drove US markets some 100% up from their March’20 lows. Unlike the markets, the economy was struggling for the most of that time but has accelerated rapidly recently on the back of vaccination-backed re-opening and a massive fiscal support. This is raising inflation risks and the pressure is seen everywhere, from used cars to lumber. The Fed argues this inflation is transitory but what if it is not?
What to expect?
The Fed will stick to its mantra for as long as it is possible. Powell realizes that any talk of tightening would see bond yields soar just when the US Treasury needs to start borrowing massively to finance the record post-war deficit.
This will leave investors searching for any hints of what the FOMC really thinks (but does not want to say, at least not yet). The statement is a place where we can expect to see improved assessment of the economic outlook.
There is also a non-zero chance for the IOER rate hike (currently at 0.1%). In theory this would be a purely technical move to absorb some of the excess liquidity. Then again, this excess liquidity has buoyed stocks in April so far so it’s not that meaningless.
Which markets to watch?
The impact of the FOMC decision should be most clearly seen on markets like US500, US100, EURUSD, TNOTE and GOLD. In theory, any concerns of inflation could be negative to all of these markets and conversely, a sanguine Fed could be positive.
FOMC as a profit taking catalyst? That was the case for indices on the last few occasions. Source: XTB Research
When we look at the past few meetings, we can see that the one-day impact was mostly negative for US500 (which is interesting given strong upwards trend) and positive for the EURUSD.
The impact of the FOMC decisions on EURUSD over the past 12 months was modestly positive on average. Source: XTB Research