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The Fed will find it hard to please everyone from traders to Trump



This is perhaps just the Fed Chair Jerome Powell's toughest meeting yet, because whatever the outcome, the odds are high that it will disappoint a large group of people and it doesn't even count President Donald Trump.

The Fed began its two-day meeting Tuesday and kl. 14.00 ET today, the markets will express what the Fed has opted for interest rates, future interest rate cuts and the state of the economy. Most economists expect the Fed to pass cutting rates, but move to a tone in its statement and in its forecasts suggesting a fall in prices, which many believe will be in July.

This is where it becomes difficult. The Fed now says it is "patient", willing to see incoming data and paths what to do with the policy. But after Fed officials signaled in various remarks that they could lower rates, markets are now expecting a new cut-off period. This means that the Fed is likely to change from being "patient" to something else. The other language it uses could determine how tough or hawkish the market would believe to be.

"With the market pricing in a 1

in 5 chance of a price cut for the current meeting and a 100% likelihood of a 25 [basis-point] cut in the July meeting, it is relatively easy for the Fed to disappoint risky assets" notes Alan Ruskin, leader of the G-10 exchange rate strategy at Deutsche Bank. "The biggest dilemma for the Fed is how to maintain maximum policy freedom for July without having risky assets reprice sharply negative."

In fact, a negative "reprice" of risk premiums – or just a stock exchange sale – has been the norm for the Fed meeting since Powell took over from former chairman Janet Yellen. Ruskin notes that after all Powell's 10 meetings, the S&P 500 was lower on nine of them. . data and politicians, it would be expected that [dollar] will become stronger against almost all currencies, "Ruskin wrote. The Fed's next rate cut will be the first as it lowers rates to zero in late 2008.

Powell speaks to the press at 2:30 pm ET, after the meeting, and he could use that time to clarify the Fed's message.

"I know he is Mr. Volatility … he tends to generate a lot of volatility," said Ward McCarthy, economist at Jefferies. "Who knows, especially on the heels of Draghi's comment and Trump's tweet. Almost no matter what he does, he'll surprise someone." McCarthy is in a minority of street economists who don't expect the Fed to cut rates this year.

Tuesday, President Mario Draghi of the European Central Bank set a framework for the ECB to say it could buy more assets and even reduce its negative rates. These comments sent German and French dividends to record negative and the US 10-year close to 2%. Draghi was seen as putting pressure on the Fed to be more aggressive over the easing as he widened the gap between US and European prices.

In a tweet, Trump criticized the ECB for moving to lighter policy, as it would send the euro lower against the dollar. He also criticized the Fed again on Tuesday not to relax, and when asked if he would break down Powell, he said, "Let's see what he's doing."

McCarthy said the Fed could be very clear that it has options by changing the message at its & # 39; dot plot & # 39; chart, literally a chart it uses to show which individual, but anonymous, Fed officials see as the way of the fed funds rate. The Dot plot shows ever higher rates next year, and McCarthy said it could change.

"The Fed has been trying to get freedom of choice since December 2009. I think they will reach it today but have the dot line. You still have a positive slope. They take that slope out," McCarthy said. "For the most part, it puts the ball in Trump's right because it's trade negotiations that determine things. Trump can get what he wants at lower rates, and that will be because he loses the ball."

Tailored also studied market moves post-Fed meeting and found the string of stock falling after Powell encounters to be a bit unusual.

"Although S & P normally trades higher on Fed Days, S & P has on average been a fall of 0.30% over the past 10 years. Apart from S & P's 1.55% gain on the meeting in January 2019, S & P has fallen by 9 last 10 Fed Days As shown in the chart below, there have been only three other periods during the last 25 years, with the rolling 10-Fed Day average% change for S&P dipped in negative area for several months, as it has recently had – early 2001, early 2006 and early 2014, "Tailored listing."

The company also noted that when Fed & # 39; One step, either raising or lowering the interest rate, decreases the S&P averages in the month following these steps, but it has on average gained 0.9% a month after the meetings where it has not made any price changes. 19659002] "The Fed has left rates unchanged for two consecutive meetings, and the month after each of the last two received S&P 4.17% and 2.97% respectively. A Fed on hold suggests that things go smoothly, and that's just what the market tends to suffer – not too hot or not too cold, "tailor made.


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