FOMC Meeting Preview: Impact on Interest Rates, US Federal Reserve, and Market Sentiment

The upcoming Federal Open Market Committee (FOMC) meeting has garnered significant attention from investors as they eagerly await the Federal Reserve’s decision on interest rates. The FOMC plays a crucial role in shaping monetary policy and has the power to influence market sentiment and demand for equities. Investors and Traders are speculating about the potential outcome of the meeting, with the market bracing for a negative response if the Fed decides to hike rates by 25 basis points (bps). On the other hand, a pause in rate hikes could lead to a rally in the markets, although Fed Chair Jerome Powell is expected to deliver a cautious message, considering the current high inflationary environment.

Market Probabilities for the Upcoming FOMC Interest Rate Decision – CME Fedwatch

The Fed’s Tunnel Vision on Inflation and Data-Driven Approach

The current Federal Reserve exhibits an unprecedented fixation on inflation, particularly the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) statistics. Unlike previous Fed Chair Alan Greenspan, who was cautious about reactive decision-making based on CPI statistics, the current Fed claims to be “data-driven.” This means that their monetary policy decisions are informed by lagging inflation indicators. However, it is important to note that the Fed acknowledges the lag effect of policy changes on the real economy, implying that it may take anywhere from 9 months to 2 years for adjustments, such as interest rate changes, to have a tangible impact on demand. This way of handling an economy creates instability as monetary policy is acting with such a considerable lag behind where the real-time data is sitting. 

Loss of Credibility and Reactive Approach

Over time, the Federal Reserve has transitioned from providing periodic forward guidance, where they would share their broad economic outlook and address interest rates a few times a year, to a more reactive and frequent adjustment of their playbook. This shift in strategy has raised concerns about the Fed’s credibility. In 2020, their prediction of transient inflation proved to be incorrect, and they were slow to react. This lack of confidence in their own models and decision-making process has led to a month-to-month reactive approach, heavily influenced by lagging inflation data.

The Impact of Sticky Inflation Statistics and Leading Indictors

While sticky inflation statistics may have a market impact, they are inherently backward-looking. The Fed’s positive feedback loop with the markets is largely a result of their commitment to make policy decisions based on these statistics. However, when we analyze the core baskets of CPI or PCE, which encompass goods and services less affected by environmental or cyclical factors like fuel, we find that approximately 40% of Core CPI is attributed to rent. Real-time leading indicators of rental payments indicate disinflation, suggesting that the Fed’s policies may be exacerbating the recession unnecessarily.

Pressure, Short-Term Outlook, and Interest Rate Hikes

The current Fed faces immense pressure in today’s fast-paced social media-driven world, where short-term incentives drive a focus on self-preservation. They are inclined to take swift action to combat inflation, even if it means subjecting the economy to rapid interest rate hikes. Previous Fed administrations successfully brought down inflation from over 9% to 2% within 3-6 years, but the current Fed aims to achieve the same outcome within 12 months. However, forward-looking indicators suggest that inflation is already decreasing. Additionally, employment indicators, such as the working week, point to an economic slowdown. This could be attributed to the lingering effects of the COVID-19 pandemic, where initial unemployment benefits made it challenging for businesses to attract employees. As a result, employers are reducing working hours instead of eliminating jobs altogether.

Reassessing Lagging Indicators and the Fed’s Control

Traditional recession characterization, based on lagging indicators like CPI, PCE, employment indexes, and GDP, may not justify the Fed’s data-driven approach. There is a strong argument to suggest that the Fed is currently not in control and that their forward guidance has turned into a market circus. Their monetary policy decisions are out of sync with the real economy, as evident from the rapid decline in inflation and the early signs of a recession.

In conclusion, the upcoming FOMC meeting and the Federal Reserve’s decision on interest rates carry significant weight in shaping market sentiment. However, it is crucial to question the Fed’s overreliance on lagging inflation statistics and their reactive approach. Leading indicators provide a more accurate reflection of the current economic landscape, indicating a decrease in inflation and early signs of a recession. The Fed’s credibility and confidence in their models are in question, and their data-driven approach seems out of touch with the reality of the economy.

FAQ

What is the FOMC meeting?

The Federal Open Market Committee (FOMC) meeting is a gathering of the Federal Reserve’s monetary policymakers. During the meeting, they discuss and decide on the course of monetary policy, including interest rates and other economic measures.

What time does the FOMC meeting take place?

The FOMC meeting usually starts in the morning and lasts for one or two days. The exact time of the meeting may vary, and it is typically not open to the public. The decisions and announcements made during the meeting are usually released at a specific time, which is commonly in the afternoon.

How can I watch or follow the FOMC meeting?

The FOMC meeting itself is not broadcasted or available for public viewing. However, you can view the press conference at the Federal Reserve Website

Where can I find the FOMC meeting minutes and statements?

After each FOMC meeting, the Federal Reserve releases meeting minutes and statements, which provide detailed information about the discussions and decisions. These documents are made available to the public on the official website of the Federal Reserve and are often published in financial news outlets.

How do FOMC decisions impact financial markets?

FOMC decisions, especially those related to interest rates, have a significant impact on financial markets. Changes in interest rates can affect borrowing costs, investor sentiment, and the overall economic outlook. As a result, financial markets closely monitor FOMC meetings and react to the decisions and statements made by the committee.

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