Why the market is so calm?
Investors would pay close attention to Dot Plot
Investors are going to hold their horses ahead of the Fed meeting. The Fed are expected to announce the process of reducing their balance sheet and this is very much priced in to the market. So far, the Fed has telegraphed this message very well, hence, it is about time for them to get the food of their hard labour.
The reason that the market is widely calm, and that we are still seeing the US markets hitting record highs is because the amount by which the Fed is going to tighten the monetary policy is not going to have any meaningful immediate impact. If the Fed sticks to its plan for the next three years, the total amount by which they would have reduced their balance sheet would only be 1/3 of what they have pumped so far.
This strategy gives the Fed a lot of room to put the car back into the reverse gear if things start to roll over.
The element that investors are going to pay a lot of attention to is the update on the dot plot. We expect the Fed to show a softer approach to the future interest rate hike. According to their last projection, the Fed expected seven rate hikes by the end of 2019. However, in the new forecast, the market is widely expecting them to drop one interest rate hike.
Anything which deviates from the Fed’s plan would spark a concern for the markets. We do think that another rate hike by the end of this year still has a 40 percent chance, however the upcoming economic data is going to keep traders on their toes due to the massive footprints of hurricanes. If the economic numbers starts to bounce back up, and reducing the size of the balance sheet jells well with the market, the odds would be really high for the December rate hike.