The Federal Reserve meeting this week is not only important to stock investors, but also to those who have ventured into the crypto market.
We will be seeing Jerome Powell hit the podium to announce what the Fed is going to do with interest rates on Wednesday afternoon - the whole world will be watching.
There are two big questions on everybody's mind as the time gets closer:
- Is the Federal Reserve going to raise interest rates, and if they do, by how much?
- How High are interest rates going to go before the job is done?
These are the questions we have been hitting on, time and time again, as the market has hit pitfalls consistently for the better part of a year and everybody is looking for the bottom to hit which likely will coincide with peak interest rates.
Of course, this is barring the statistic that the first three interest rate cuts are typically bearish for the market - this is only because people have given up on the market, throwing their hands up and stepping to the side...
So, to start to get answers to these questions we need to assess this information using the most up-to-date data that we can get our hands on.
Starting off we turn to the CME FedWatch tool I've been pushing on you guys for weeks now:
This indicator has been getting whipped around for the past week.
Before the Silicon Valley Bank (SVB) collapse, there was a neck-and-neck race between 25- and 50-basis points from the Fed. For what it's worth there was an 80% chance for a 50-basis point hike while Jerome Powell was testifying before congress...
As of right now, the expectations of the market are dictating that there is a 0% chance that we see 50 basis points from the Fed on Wednesday.
Then last Sunday when we heard the Fed was going to place a backstop for depositors, the chances of a 50-basis point hike were off the table and the market shifted towards the possibility of no interest rate hikes at all.
This is still the less likely scenario as right now there is only a 38% chance that we see a "no-hike" situation, so it's best that you keep those Solomon boots laced tight.
So this is how everything has played out bringing us to this point, in January, we saw inflation begin to lower at a snail's pace.
And as a result, Powells' testimony to congress was of the sentiment that they were having difficulty bringing inflation down.
When this was happening, it was before we started to see our financial institutions break down.
Inflation had seemed to hit a wall, and the banking system wasn't having the same issues that we are seeing today.
now, that the cat is out of the bag on the banks and the cracks are showing that they are struggling with interest rates going higher, people are concerned that the continuation of interest rate hikes will bring about even more issues within this sector.
The Fed is going to be taking this into account - there's no doubt about that.
The next thing that happened was the February inflation report turned out to be much better showing a drop in inflation from 6.4% in January to 6% in February.
This gave the market something warm and cuddly to latch onto as inflation was dropping at a much better pace.
If I'm being honest, the bank failure was the more impactful of the two as the probability of a 50 basis point hike fell before we received the new data.
It's likely that people are of the notion that something has already broken in our financial system and that is why the banks are starting to fall, the watercooler theory of the market is that further rate hikes will cause the system to collapse.
At least, that's the argument for people who are expecting a pause...
I'm a man of the data, and the data is telling all of us that's likely not what we are going to see.
Remember, the banks that are failing are not the big banks, the big banks are still sitting high and proud, even offering help to these smaller banks that are struggling in order to keep trust in our banking system.
And between that and the FDIC and Federal reserve stepping in to support these banks to avoid contagion - the banks, although still at risk, are safe for now and the fed is likely not in any jeopardy of entirely collapsing the system with another 25 basis point hike... yet.
The point is with inflation still at 6%, the Fed just can't afford to walk away from this battle as they would risk unraveling the months of work they have done to get inflation down to where it is.
And I know what you're thinking "who cares, it wouldn't take much to get back on track"
You'd be wrong as there would be a loss of confidence in the system and the situation would be much worse.
I know that was a lot, but that was just the first question answered, Yes, the Fed is going to raise interest rates at the next meeting and it'll likely be 25 basis points.
But there was one other question that I posed in the beginning of the article:
What will pique interest rates be?
At this upcoming meeting, the Fed will be updating their economic forecast and tell us what they think pique interest rates will end up being before the job is done.
Keep in mind we are currently at 4.75%, if they raise rates the expected 25 basis points on Wednesday we will be right at 5%.
At the last meeting, they were telling us that interest rates need to go to 5.25%.
Meanwhile, the market was telling us that they expect the Fed to stop at 5% on the dot.
So, if the Fed changes its outlook from 5.25% to 5.5% at Wednesday's meeting, it could be devastating for the market.
Really even if Jerome Powell doesn't come out with a dovish tone, it's going to get ugly.
And if you remember he was VERY hawkish in his testimony echoing that there will be no Fed pivot at all this year...
The question here is are the recent economic reports and banking turmoil enough to change his mind...
Well, only time will tell and I expect to see you in the room this week so we can watch it unfold together every morning at 9:45 AM EST during the Long and Short of it.
And to sweeten the deal I'm going to be holding a special session on Wednesday AFTER the Fed to discuss the fallout and more importantly, how we are going to trade it.
Be sure to look out for details hitting your inbox in the coming days and I'll see you in the morning!
The post 3 Days Until the Fed Meets: Everything you need to know to be prepared appeared first on Penny Hawk.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.