Fed Response to How Much Longer Rates To Stay High -> 5% Pullback or Rally?
As investors await the delivery of Federal Reserve interest rate decision on Wednesday (20 September 2023). Market is expecting a rate hike pause this round.
But the more pressuring question would be is Fed nearing the end of its rate-hike cycle, as shown in the past this has been a pillar of the 2023 stock-market rally.
Fed comment or decision to how much longer rates to stay high would be something to look at. As we know a hawkish response would be bad for stocks and bonds whereas dovish would mean good for stocks and bonds.
Fed Dot Plot
From the dot plot, even though the market does not expect a Fed rate hike but we can see that it is suggested that there will be one more hike this year before rate start to fall steadily down.
Once we see the rate fall and we can expect some rate cuts. If FOMC suggest higher rates and longer period, then most likely we can expect Fed Chair to give a hawkish tone.
While the Fed is almost fully expected to leave rates unchanged on Wednesday(20 September 2023), market would be paying close attention to what dot plot has suggested (one more hike in 2023), but sight for clues to the when(timing) and scope of future potential rate cuts.
Potential 5% or More Pullback
If we see message hinting that market is digesting “rates will be kept higher for longer”, then I would think that we might experiencing a 5% to 10% pullback.
If Fed decision is for a hike, this would cause a shock to the market, resulting in a steep decline across the board. We will also see a higher spike in U.S. Treasury notes.
Potential Market Rally Or Market Stay Flat
If Fed decide to leave rates unchanged and the tone for the future outlook does not change. Median rate remain at 5.625%, then we might see market trading flat while digesting what is Fed showing.
The June projections had a median 2023 dot of 5.625%, indicating policy makers expected to deliver one additional rate hike before the end of the year.
If the median fell down to 5.375% on Wednesday (20 September 2023), then this would indicate that Fed is done with its rate hike campaign. Market should respond with a good rally, megacap stocks should benefit.
Summary
From what we have seen from the dot plot, it looks like Fed message to what market is expecting on the hike is important. There is a likely chance of rate hike pause for now, but we do need to expect another rate hike this year (2023).
What would be important would be rates to remain higher and longer, that would be no good for the market. We might expect pullback and correction till end of year.
Appreciate if you could share your thoughts in the comment section whether you think Fed message at the FOMC meeting would be hawkish or dovish?
@TigerStars @Daily_Discussion @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.
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It is expected that the Federal Reserve's policy guidance will no longer focus on how many more rate hikes are expected in the future but rather on how long they can maintain the terminal rate once reached.
The Federal Reserve is currently reducing its holdings of government bonds and agency mortgage-backed securities, allowing the private sector to provide more financing for the massive government borrowing. Under otherwise identical conditions, this should imply higher interest rate levels.
The market will closely monitor the Federal Reserve's forward guidance to gain insights into their views on future monetary policy.
The Federal Reserve will maintain a cautious stance to avoid triggering excessive market reactions.
When it comes to the FOMC, I feel that everything about it is not reliable. Be cautious of risks.