Every meeting is a live meeting, this is the message which Jerome Powell delivered the last time. Traders are going to make their moves depending on these important factors.
This is an important week for markets and there are several events that are going to keep investors on their toes. The most important event is the Federal Reserve meeting taking place on Wednesday.
Remember, the chairman of the Federal Reserve, Jerome Powell, has already given a clear message: every meeting is a live meeting. Hence, investors are going to listen to his statement very carefully. This is despite the fact that not many have priced in another interest rate hike during this meeting.
If you recall, the Fed increased the interest rates four times last year making the president of the United States, Donald Trump, really unhappy about this. The equity markets also indicated their discomfort and started to face a major turmoil towards the end of 2018. It was then, that the Fed decided to become less hawkish; the committee scaled back from their interest rate hike guidance for this year. Initially, the Fed was going to increase interest rates 3-4 times this year, but the reality hit them, and they decided that two interest rate hikes may be enough for this year,
The Fed’s biggest task is to avoid any kind of severe financial instability. They cannot afford to undo all the hard work they have done over the last five years. However, at the same time, the Fed also needs to create room for themselves and buy back enough animation (tighten the monetary policy so that they can relax it again) . Hence reducing the size of the balance sheet and normalising the interest rates have been a significant priority for them. In order to avoid the bouts of financial volatility, just like the two of his predecessors, Jerome Powell needs to add more colour in his official statement and language. Markets need assurance that the Fed president is working for them not against them. If he doesn’t deliver on this, it creates panic and the Fed runs a risk of moving the timeline of another crisis closer than where it currently is.
On the economic data front, the element that stands stronger is the job market: the weekly jobless claims data is at 199K, in order words, it is near its 50-year low . This tells us that the job market is solid, and it continues to create more jobs. The solid job market is also supporting the wage growth and attracting workers who have been discouraged to participate in the labour force. In simple terms, jobs seekers are returning to the workforce.
This element of the job market made the Fed keep the economy on autopilot. This stance was deemed immensely hawkish by the market participants. The reality is that the global economy is not as strong as it was last year because of the lack of the central bank support in terms of their dovish monetary policy; most of them have started to tighten the liquidity taps and this has triggered suffocation for the global economic growth.
The upcoming meeting is going to be decisive for the market sentiment and the Fed needs to make sure that the terms they use are market friendly. Their recent policy guidance has led to a rebound in market confidence with the S&P 500 over 10% up from its December lows, confirming the argument that the Fed’s monetary policy has a direct effect on the markets.
To sum it up, in this meeting, the Fed needs to strike a balance in their language. This is no easy task though. The economic data is forcing the Fed to keep the economy on autopilot while market participants expect from the Fed to avoid the same mistake that led to market turmoil in June and continued all the way to December.
Thus, to control all of this, the Fed needs to tailor the message in their statement and speech very carefully. It should acknowledge that the future interest rate hikes depend on the health of the economy. They also need to point out that the next version of Fed Dots and economic projection may be skewed to the downside. To balance this extremely dovish stance, the Fed needs to acknowledge that the global geopolitical risk has improved, and the curve has shifted to the downside. The message should be that they are open to take control of their destiny. Jerome Powell needs to make it clear that the Fed Committee has the full ability to alter the current pace of balance sheet reduction according to the needs of time.
Overall, the goal for the Federal Reserve should be to avoid any self-inflicting statements. They have tailwind on their side. It may not be as strong as in the previous years, but the force is still there.