The first in a long series preparing for this week's Fed meeting
The Federal Open Market Committee's (FOMC) highly anticipated meeting gets underway tomorrow, March 15. The two-day gathering will conclude at 2 p.m. on Wednesday, March 16, with comments from Fed Chair Jerome Powell about monetary policy and the overall state of the U.S. and global economy. CME Group's FedWatch tool projects a 25-50 basis-point rate hike from the central bank at the meeting's conclusion.
It's safe to say all eyes are on the Fed. With Russia's invasion of Ukraine, inflation spiking stateside, and Covid-19 cases dropping, the Fed's actions and subsequent comments will go far in shaping how the rest of the year unfolds. To help unpack this monumental week for Wall Street, we asked Scott Pederson Owner, Wealth Manager at Harmony Wealth Management to weigh in with some broader thoughts on the matters at hand.
This will be part one of a mega-Fed series, so stay tuned for more in the coming days!
The market has already priced in the expected .25% hike in the Fed Funds Rate. Chairman Powell stated last week that he expected the committee to raise the fed funds rate .25% and the CME Fed Funds futures are currently pricing in a 97% probability of the .25% hike. I would expect the Fed to be more data dependent in rate hikes the rest of the year with the current volatility uptick due to the Russia/Ukraine situation. The market is currently pricing in a total of 5 hikes of .25% this year. The Fed needs to be more cautious due to the fact that the yield curve is continuing to flatten and the spread between the 10-year and 2-year Treasury yield currently sits around .25%. Historically, the inversion of the yield curve sets the clock toward the next recession, which normally occurs about 12 months after the reversion.
Also, the Fed's completion of their tapering of asset purchases has led to tightening of policy even before they have raised rates. According to the Federal Reserve Bank of Atlanta, The Wu-Xia Shadow Federal Funds Rate has tightened 1.65% from November to the beginning of February as the Fed is completing their asset purchases in March. This is not including the potential for rolling off some of their balance sheet later in the year, which is another form of monetary policy tightening. This is important because the neutral rate that the Fed is trying to tighten to has been decreasing for the last 30 years, which means less rate hikes this cycle, and recession tend to come about at the end of rate hike cycles not the beginning.
The Other Shoe to Drop: Economic Projections
The other important item coming out of their meeting will be the update to their economic projections to see where the committee sees gross domestic product, the Fed Funds Rate, unemployment rate, and inflation looking forward. This will give a sense of where the committee is on economic growth and inflation which impacts their thoughts on rates. Markets tends to historically perform below average in mid-term election years with the first 2/3 of the year being choppy going into the mid-term.
This, along with the current Russia/Ukraine situation will lead to increase volatility, however markets tend to rally from the mid-term into the third year of the presidential cycle. Corporate earnings will be the important factor to see how companies are able to take higher input cost and if they are still able to pass them on to consumers, if they are not able to continue to do so, profit margins for these companies will begin to fall and could impact their earnings.
*This article is published for purely informative purposes. Pederson's opinions are not necessarily a reflection in any way of those of Schaeffer's Investment Research. We publish information about companies in which we believe our readers may be interested. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalized advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as SIR's solicitation to effect, or attempt to effect, any transaction in a security. Investments in the securities markets, and especially in options and futures, are speculative and involve substantial risk. The information that we provide or that is derived from our website should not be a substitute for advice from an investment professional. We encourage you to obtain personal advice from your professional investment advisor and to make independent investigations before acting on the information that you obtain from SIR or derive from our website.*