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

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.

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