Prepare for the most anticipated market even in January❗
- Fed will not change rates today
- Guidance from Powell critical for markets
- Decision at 7pm GMT, conference 7:30
- We will be updating you in the News section
Time for difficult decisions
Inflation in the US is the highest in nearly 40% and at 7% the Fed no longer calls it temporary. Whatever the reason behind the change in the narrative (economic or political) the Fed finally seems eager to treat inflation seriously. And that means monetary tightening. After a massive rally in stocks and cryptocurrencies fueled by money printing we are quickly transferring into a period of completely opposite polices. Little wonder markets are nervous. But what can they expect from president Powell and the Fed today?
What is at play?
The Fed has already strongly suggested that the first interest rate hike will take place in March. Because additional materials (including a dot-plot, where FOMC members project their expectations of future rates) are released at meetings that end a quarter, the Fed may stay silent on the rates and barely mention a likely rate hike in March in the statement. This is already widely anticipated. That means other things might be more important for market reaction and these include:
Balance sheet reduction (also called QT – Quantitative Tightening) is an opposite to QE aka money printing. The Fed flagged their intention to do it but we do not know when and at what pace. This is critical because it affects market liquidity more than rates. Strong QT is much worse for indices than rate hikes.
Early end to QE – yes, the Fed is still printing money! Powell said in December that they had intention to phase out the program in mid-March – just before the hike. Early end of this would be seen as unpleasant for markets.
Inflation narrative – just how serious is Powell on inflation? Does he sound like they will tighten policy regardless of market turbulences? This is subtle thing, but it also will be important for market reaction (we will cover his remarks in live updates from his post-meeting conference)
3 market scenarios
POSITIVE – potentially positive for US100, US500, EURUSD, GOLD, BITCOIN potentially negative for VOLX
The Fed maintains QE as planned and is vague on future moves. Even if Powell confirm the first rate hike in March but is non-committal on the future hikes and QT markets will see this as a relief and a sign that the Fed got intimidated by the latest market correction.
NEUTRAL
The Fed maintains QE, confirms March hike and QT but without details. Remember, markets already expect significant tightening so just confirming this should not trigger market reaction – even a relief reaction is possible in this scenario!
NEGATIVE - potentially negative for US100, US500, EURUSD, GOLD, BITCOIN potentially positive for VOLX
The Fed drops QE immediately and/or suggests a serious QT program. This will mean that the Fed is serious about fighting inflation regardless of market turbulences and could potentially scare investors.
Charts to watch:
US100 has seen the deepest (18%) correction since March 2020. It’s been also very rapid which led to oversold conditions and that means investors were keen to use a strong support around 14000 to try and fight back. Ultimately this index is the most dependent on the Fed policies and while technical situation may offer a hope for the bulls that might not be enough if negative scenario materializes today.
VOLX measures volatility on the markets. It can be subdued for a long time when markets are calm and usually rises sharply during abrupt selloffs. A recent selloff saw VOLX rising to the highest level since February 2021 but still short of 36 points – a point of reversal twice in 2020 and once in 2021.
