How Will Stocks React to Today’s Fed Announcement?

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There have been times recently when even I, as someone who for many years worked in forex dealing rooms and therefore viewed central banks as the enemy, have felt sorry for Jay Powell. He has been the person tasked with telling people the inevitable bad news, which is that the free money party that has been going on since 2010 has to end and that the hangover will set in. He will presumably be acting in the same role when the latest FOMC meeting ends today, but there is one notable difference between today and the statements and press conferences that have followed recent committee meetings: the market reaction today is unlikely to be extremely negative, almost no matter what Powell says.

Don’t get me wrong, I still believe that stocks will head lower over the next few weeks and months, and we may have to at least test the June lows before we really turn around, but the immediate reaction to this afternoon’s announcement is unlikely to be a big drop. Consider a few possible scenarios, and you will see why there is very little that Powell can do or say this afternoon that will cause a notable selloff.

The most likely outcome of the meeting is that the committee does what everyone is expecting; they cut rates by seventy-five basis points, or three quarters of one percent, and the language and intent of their statement stays basically the same as it has been. Phrases like “data dependent” are used alongside the somewhat contradictory notion of a time when they pause the hikes to see what impact they have had. That will be seen as “not as bad as it could have been,” with the added bonus of looking forward to a time when rate hikes end, if only for a while, and stocks will rally.

Or they could do what some hawks are asking for and predicting and hike a full point. That is extremely unlikely given both what Jay Powell and his colleagues have said to this point and their natural inclination to not shock markets, but let’s assume it is possible. There is a growing feeling amongst traders and analysts that the pain caused by a rising rate environment is inevitable. Interest rates have to get to a certain point to combat inflation and getting there faster by way of bigger moves is preferable to prolonging the agony with a constant drip of smaller increases. Given the real-world impact of rate hikes that may not be the case, but market reaction to news is about mood and expectations rather than reality. So, even a full point hike could be seen by enough traders as a positive to limit the negative reaction or prompt a decent bounce back should one come.

The third scenario would be the committee deciding that we are already at the point where they want to observe the impact of the rate hikes they have already implemented and will therefore increase by less than 75 bps, or even hold rates steady. This is even less likely than a more hawkish approach than anticipated and, ironically, could be the one thing that would, after an initial knee-jerk move higher, cause stocks to accelerate their move down. Even though it seems like a better thing for stocks it would be seen as indecisive and unrealistic and raise the specter of dragging out the agony unnecessarily.

The thing is, the market is going into this thinking they know what is coming, and they are probably right. So, when the announcement comes and after the algos have done their thing and created an initial reaction, we will settle down, without a big move in either direction. Unfortunately for investors, the focus will then turn to the fact that whatever the Fed did, inflation can’t be tamed without seriously slowing the economy somehow and stocks will continue to grind lower. But for a day or two, we may see a relief rally no matter what is said and done, with Powell avoiding being cast as the devil and simply being seen as what he is, a man doing a difficult but necessary job.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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