To The Moon

Investors and markets across the world will keep a close eye on what transpires at the US Federal Open Market Committee (FOMC) meeting. The meeting is scheduled for Tuesday and Wednesday, and the markets will know the monetary policy direction of the US central bank by Wednesday, Washington time.

For now, Market and Most of the large institutions expect 25bps rate hike inMarch:

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Amid soaring inflation in the United States, at 40-year high, and that core PCE inflation is at a 30-year high, unabated worries over Russia and Ukraine war, the FED is all set to hike interest rates at the upcoming FOMC meeting, making it the first hike rate since 2018 and steadily tighten monetary conditions.

Some experts said the Fed could raise rates four to seven times in the next year depending on the evolving situation. Effectively, this will take the target Fed Funds rate to 1.75% by the end of 2022 – implying there will be at least one hike of 37.5 bps to normalise the rate."

1. The QE is Over, When Will it Come Back?

The global finance community will also be closely watching the Fed’s commentary for clues related to bond purchases and how it intends to unwind its heavy balance sheet.

Last week, the FED finished its last purchase of about $4.025 billion QE plan(shorter-term Treasury notes), andMBS purchases also stopped.

The primary bullish argument for owning stocks over the last decade is that low-interest rates [the Fed’s QE programs] support high valuations.

For the last 12-years, the investing mantra was simple “Don’t fight the Fed.” As long as the Fed pushed liquidity into the financial system, there was no reason not to own equities.

The problem for the Fed is they are currently still at 0. Therefore, with the Fed’s QE removed, any hikes to interest rates will exacerbate substantially tighter monetary policy. 

Global financial conditions are tightening at spectacular speed under pressure on all fronts from Ukraine sanctions, the Fed and rising DXY.

Jasani of HDFC Securities believes that if the rate hikes are faster and sooner than expected or there are any indications of them being so in the Fed’s commentary, the global markets could react negatively. 

2. Detailded Influences on Global Markets

U.S. stock futures struggled for direction early Tuesday morning: Dow Jones Industrial Average futures$DJIA(.DJI)$ were flat. S&P 500$S&P 500(.SPX)$ and Nasdaq 100 futures$NASDAQ(.IXIC)$ climbed 0.15% and 0.34%, respectively.

• How does the End of QE Affect your Stock?

Based on data from the U.S. central bank and Bank for International Settlements going back to 1994: The U.S. currency has weakened by an average of 4.1% during the Federal Open Market Committee’s four previous tightening cycles.

Deutsche Bank Research found through a review of market changes after historical Fed rate hikes:U.S. economic growth usually remains strong in the first year of theratehike when inflation and the stock market continues to rise; in the second year, economic growth begins to slow down.

After a rate hike cycle begins, stock indexes change similarly to bond yields: they usually start to move lower from the 9th months-1 year after the first rate hike.

The average price of the S&P 500 tends to have a solid increase in the first year of a rate hike cycle, with an average return of 7.7% after one year. But after two years of tightening, the index began to rise.

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Question For You:

When will the QE come back?  Will the FED Rate Hike and Print at the Same Time?