FOMC Talking Points:
- The FOMC is expected to hike rates for the first time since 2018 at today’s meeting, announcement set for 2pm ET.
- Today’s rate hike has been well-telegraphed from the bank and at 25 bps move is highly-expected. But what else will the Fed say? The bank’s forecasts and projections are likely to be far more important than a 25 bp hike, and the press conference can take on special importance this afternoon so markets can get an idea for how Powell and the Fed are looking to navigate through already-high inflation as a possible World War brews in the background.
- I looked into FX markets ahead of today’s rate decision in yesterday’s webinar.
- The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.
Today is the big day, the FOMC is expected to hike rates by 25 basis points while initiating lift-off. This will be the first rate hike since before the pandemic. The Fed cut thrice in 2019 and when the pandemic hit in Q1, 2020, the bank triggered a plethora of liquidity programs that helped U.S. markets to find support and, eventually, put in one of the largest and most extended rallies that any of us have ever seen.
But we’re fast nearing the moment of truth, when that stimulus comes off as the FOMC begins to tighten the monetary backdrop.
For today, we’re looking for a simple 25 basis point hike and with a 96% probability of such, it would probably be far more disappointing (and volatile) if anything else happened. Just a month ago there were strong probabilities of a 50 basis point hike today, largely in response to the still-aggressive inflation that’s printing in the U.S.. But the ongoing situation in Ukraine has caused policy-makers to be a bit more risk averse, and a number of Fed speakers mentioned ahead of the blackout period that they would be supporting a 25 basis point hike for this first move in March. So that’s what we’re looking for.
A bigger question, however, is what else the bank will have in store for the rest of this year? And we find ourselves in a precarious position with inflation at 40-year highs while a possible World War scenario continues to brew. While markets have exhibited a bit of calm over the past couple of days, this situation seems far from over and this is certainly something that can cloud the Fed’s outlook.
But, with that being said, its that outlook that will likely be the big driver from today’s rate decision. This is a quarterly meeting, meaning that the Fed will issue updated guidance and forecasts, sharing their opinions on where inflation will move and how rates will be adjusted in response to this.
But, given how wrong those inflation forecasts were last year, that part may be taken with a grain of salt while the dot plot matrix, showing Fed members opinions on where rates will be in the immediate future will likely generate considerable focus.
This is where the rubber meets the road, as right now markets are expecting 7 hikes this year, including today’s. This would bring the Fed Funds rate up to the 1.75-2% range in a very short period of time.
Rate Probabilities for December 2022
Chart prepared by James Stanley; data from CME Fedwatch
Some Possible Slack from the FOMC
With markets expecting 7 hikes this year and a near 10% chance of a whopping nine rate hikes, there’s a lot of room for the Fed to provide some optimism. If the Fed comes out with a forecast of five hikes, this could provide a boost to stocks that are already expecting a heavier hand.
The big question is whether the Fed will go dovish today? While that has been a pattern in the post-Financial Collapse world, there’s also never been such a forceful run of inflation. This may eliminate their ability to go significantly dovish as the bank can no longer ignore inflation and that’s what can be different today from what we’ve become used to around FOMC rate decisions.
Of note has been the recent compression in the yield curve, with the US Treasury 2/10 spread fast-nearing inversion. This is a common signal ahead of recessions, with the prior three instances over the past 22 years showing ahead of a) the dot com bust b) the global financial collapse and then c) a few months before Covid came into the equation.
US Treasury 2/10 Yield Spread
Chart prepared by James Stanley; data from Tradingview
Stocks Rally Ahead of the Fed
In what initially looked like a short-covering rally, U.S. equities have rallied ahead of the FOMC rate decision. This appears to be the expectation for the Fed to soften the blow of policy tightening this year. This can make for an interesting backdrop across equities for today’s rate decision.
In the S&P 500, prices are already testing resistance on a falling wedge formation. Falling wedges are often followed for bullish reversals, so this points to the fact that some appear to be expecting the Fed to trigger a rally here. The fact that this is showing ahead of the rate decision makes it all the more interesting, as it appears as though we’re seeing some positioning ahead of the event. Perhaps it’s short covering in front of a possible catalyst? But that’s unclear at this point with a few hours to go before the FOMC.
Weekly resistance is at 4325 and this is what’s holding the highs for now, and that’s confluent with the topside of the rising wedge. There’s additional resistance at 4377/4400, and another big spot at 4472.
As I’ve shared quite a bit over the past couple of months, I remain bearish on this situation but price action leads the way. If the falling wedge breaks today, there’s the possibility of bigger-picture reversal. But I’m going to look for additional confirmation, which I’m expecting would come from a push above 4400, followed by a pullback, at which point current resistance can function as follow-through support, around 4325.
S&P 500 Eight-Hour Price Chart
Chart prepared by James Stanley; S&P 500 on Tradingview
— Written by James Stanley, Senior Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX
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