What To Expect When You’re Expecting The FOMC (September 2021 Edition)

This afternoon not only brings the first of day of autumn here in the Northern Hemisphere, but also the potential for some cooling rhetoric from the Federal Reserve Open Market Committee (FOMC) as their two-day meeting concludes this afternoon.  At 2:00 PM Eastern Time, traders and investors alike will be eagerly anticipating first the FOMC meeting statement and the subsequent press conference with Chair Powell.  The questions on everyone’s mind are these:

• Where do we stand vis-à-vis the Fed’s goals of full employment and sustainable 2% inflation?
• Is a tapering of the Fed’s monthly $120 billion bond purchases on the horizon?  If so, when will that start and how quickly will it proceed?

We can come up with a myriad of other pertinent questions, and I have no doubt that some of the intrepid reporters at today’s presser will pepper the Chairman with several difficult ones, but the answers to the questions above are likely to have an inordinate influence upon market psychology in the weeks ahead.

Investors may be surprised to learn that equity markets are frequently not pleased by what they hear in the immediate aftermath of these meetings. The table below makes that performance plain.  It shows the 3-day performance of the S&P 500 Index in the three-day period surrounding all the FOMC meetings since the Covid crisis.  This updates a table that we published prior to the last FOMC meeting:

3 Day Changes after Previous FOMC Meetings and Close of Prior Day through 2 Days After Announcement

Each time I update the table, I am amazed at how poorly the S&P 500 Index (SPX) performed after FOMC meetings despite the raging bull market that was otherwise occurring.  During the timeframe covered in the table above, over 62% of the 3-day periods were higher.  Yet 10 of the 12 periods that followed FOMC meetings were lower!  The only explanation that makes sense to me is that FOMC meetings are usually a “buy the rumor, sell the news” event.   Traders should bear that in mind as we see major US indices trading about 1% in a belated “buy-the-dip” after Monday’s declines.   It is clear that Evergrande was the excuse for a bout of profit-taking, not the start of something more significant to US investors.  (This is something we noted on Monday)  But the relentlessness of the morning rally speaks more to enthusiastic traders than a sea change in the world’s investment climate.

I’ll throw in the standard disclaimer here, as it undoubtedly applies in this case: Past performance is no guarantee of future results.  Just because either the Fed or Chair Powell has disappointed markets after most of the past few FOMC meetings does not mean that disappointment will follow over the next few days.  And also bear in mind that markets have clearly liked the vast majority of what the Fed has been doing over the past 18 months.   The progression of numbers in the 2^nd column of the table above certainly demonstrates that.  Yet this meeting offers the possibility that the Fed will offer a major change to the extraordinarily accommodative policies that have fueled the boosts in a wide range of asset prices – not just equities. 

We will find out if the Fed is indeed ready to take their foot of the monetary accelerator, and if so, how will they communicate that policy change.  And most importantly, will that communication be something that mollifies or unnerves investors?