Buckle up, folks. This year’s final FOMC meeting is concluding today, with traders and investors alike eagerly anticipating not only the central bank’s statement at 2 PM Eastern but also Chair Powell’s press conference a half-hour later. It will be fascinating to see how markets digest the meeting’s aftermath, as it arrives ahead of a quarterly expiration on Friday and an ensuing holiday-shortened week.
Since the last meeting, there have been some highly significant economic developments. We had a weaker than expected nonfarm payrolls report early this month followed by CPI and PPI releases that exceeded expectations. During Congressional testimony, Mr. Powell eliminated the use of “transitory” as a descriptor of inflation and indicated that a faster taper may be coming.
As a result, the consensus view appears to favor a faster taper of $30 billion per month, causing it to end in March. Since the Fed has previously indicated that they are unlikely to raise their short-term rate target before bond purchases have finished, this earlier end could push forward market expectations of higher interest rates. The former is a cut and dry number – they will either taper more quickly or not, and the timing of the end date is a matter of simple arithmetic. The latter is far more nuanced, requiring a view of the “dot-plot” and considerable explanation by the Chairman.
It is important to consider the aftereffects of previous FOMC meetings, as shown in the table below:
There are three things that should jump out at readers of the data. First is the sustained rise in the columns that contain the S&P 500 Index levels. We all know that this is a significant bull market, and those columns make it readily apparent. The second is the preponderance of red in the table. There have been 14 FOMC meetings since the Covid crisis hit last year, yet we have seen declines after 10 of those 14 meetings. It was actually 10 of 12 before rising after the past two meetings. The third is that there have been 4 prior meetings that occurred during quarterly expiration weeks, and all 4 have finished lower. To be fair, both of the latter two data points are based upon relatively small sample sizes, but I believe they are informative nonetheless.
The improved performance after the past two meetings may indicate a change in market psychology. From March of 2020 onward, traders were conditioned to expect monetary accommodation. The Federal Reserve’s balance sheet was growing steadily and their open market activity was designed to provide substantial stimulus. It is quite reasonable to think that traders were expecting dovish commentary from the FOMC statement and the Chairman, and were disappointed if either failed to impress. During the 3rd quarter of this year, the market’s mindset changed. Investors began to expect that the Fed would become less accommodative and announce steps to slow their pace of stimulus. Rather than being disappointed if the Fed failed to impress, they became encouraged if the Fed failed to depress. As I write this, we are experiencing our third straight day of selling. It is possible that traders’ expectations have been sufficiently suppressed to allow a bit of a relief rally if today’s messaging is less dire than feared.
In prior articles we cited the famous 1955 quip by William McChesney Martin, Jr., Fed Chair from 1951 to 1970: “The Federal Reserve, as one writer put it… is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”My current view is that the punch bowl will still be there, they will simply be refilling it at a much slower pace. The larger question is whether they will tell us when they’re taking it away entirely.
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