What You Need to Know Before This Fed Meeting, Pt 2

The Fed may be totally data dependent for the remainder of 2022

Managing Editor
Mar 15, 2022 at 11:13 AM
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    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 Sankar Sharma, Certified Market Technician and founder of RiskRewardReturn.com to weigh in with some broader thoughts on the matters at hand.

    This is part two of a mega-Fed series, so stay tuned for more!

    We have the backdrop of the Ukraine -Russia situation and oil prices at 14-year high. The Nasdaq is down over 20% from highs. Gold is at 2K, Palladium is at 3K, inflation is at historic highs and Nickel has doubled in price. All these headwinds are going to put Fed meetings on the spotlight repeatedly this year. The Fed is using the two top tools, tapering and tightening, to deal with it all. The Fed has dual mandate, maximum employment, and price stability.

    As far as March expectations are concerned, Federal Reserve Chair Jerome Powell already stated that the Fed needs to be nimble and mentioned the current inflation and oil prices keeps the case for tighter monetary policy strong. One can expect a 25-basis point hike in the March meeting as implied by the Fed.

    If we focus on the potential stock market impact of the March meeting amidst the Ukraine/Russia war, a few things stand out. The market has already priced in the expected rate hike in March. However, future rate hikes could move the markets down. The U.S. dollar and financials could benefit from future rate hikes. If the Fed keeps it to the 25 basis points cut, the market may not react much to the interest rate news. If there are any surprises, then the market will likely react negatively, although this alternative is currently out of scope.

    For the rest of the 2022, the Fed will be totally data dependent. The Fed will not follow a pre-set path for the rest of the year and will closely monitor data. While the market is expecting seven to nine rate hikes, such an aggressive stance can push the U.S. economy into early recession. It is reasonable to expect three or five rate hikes this year if the war situation doesn’t deteriorate from here. Investors should not forget that the Fed also must do a run-down of its $9 trillion balance sheet. Rising oil, rising dollar, rising interest rates, tapering and - of course -rising oil are going to put a lot of pressure on the markets. 2022 will remain a volatile market and one should not expect the same market returns as 2020 and 2021.

    *This article is published for purely informative purposes. Sharma'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.*

     

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