Federal Reserve Main Focus for the Week

Alan Penny

28 October 2019

3 min read

Federal Reserve

  • Wednesday interest rate decision
  • Interest rate cut expected, focus on statement
  • Influence on multiple markets

During this week, trading markets could be somewhat quiet as the focus will be on the Wednesday session, with the Federal Reserve having the FOMC Statement involving interest rates.

At this point, traders are trying to position themselves for an expected interest rate cut on Wednesday. However, the real “meat on the bone” is going to be the statement that accompanies the interest-rate code. Anticipated by the market is a 25-basis point cut, so that probably won’t move the market much.

The most likely scenario

The most likely scenario will more than likely also be accompanied by some type of suggestion that bonds will be bought by the Federal Reserve.

FedWatch tool

The most likely scenario is that the Federal Reserve cuts the interest rate by 25 basis points, which is already “baked into the markets.” That in and of itself doesn’t really matter. Ultimately, the statement will be crucial. It will probably be very similar to what we have seen lately, something to the effect of the Federal Reserve monitoring the situation and potentially willing to act to stabilize and support economic conditions.

It will more than likely also be accompanied by some type of suggestion that bonds will be bought by the Federal Reserve

They will more than likely suggest that they are watching global conditions as well, and perhaps even mention something about trade war influences. With that in mind, it’s probably a very bullish scenario, as traders will look at that as a bit of a “Powell put”. This doesn’t necessarily mean it’s the truth, but it does mean that equities traders will probably jump in and start buying.

It will more than likely also be accompanied by some type of suggestion that bonds will be bought by the Federal Reserve, and perhaps bond traders will jump in and start buying as well. This will drive down yields as front running the Federal Reserve begins.

A shocking scenario

If the Federal Reserve does not cut interest rates, this will send the markets into absolute chaos. Based upon the CME FedWatch Tool, there is a 94.1% probability chance of a cut. Beyond that, December is rated at 50%, so a couple of cuts could be coming.

However, if the Federal Reserve cuts but still sounds overly hawkish in the statement, this could cause chaos as well. In this scenario, the equity markets will probably get hammered, sending it much lower.

However, as Jerome Powell suggested hawkishness previously, the markets absolutely cratered. He has been “trained” by Wall Street not to do so.

If that were to happen, it is very likely that the market would become a complete mess. This could cause horrific losses in stock markets in the United States, which would more than likely cause a reaction around the world. The US dollar would probably spike higher, crushing other currencies such as the euro. However, this is a very unlikely scenario, and therefore the most destructive.

All things being equal, the market is likely to continue grinding higher and following the same trends that we have seen earlier. This should be good for gold, stocks, and the like. The market is addicted to cheap money, and it’s very likely it will get more.

Written By
Alan Penny

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