Some idle thoughts on today’s FOMC announcement

I’m lacking a bit of interest in today’s markets, much like the markets are themselves today. Seeing USDJPY and EURUSD stuck in a 20-pip range for hours is testament to that. I had a busy trading day yesterday, doing more trades than I would normally, so perhaps there’s a bit of a trading hangover there. Idle minds can wander and mine has over what the Fed might do tonight.

Depending on what you look at, the probability models suggest a 5.7% (CME Fed watch) or 34.2% (Bloomberg) chance of seeing a hike today but I’m just wondering if there’s a case for the Fed to sneak one in?

So, here’s some of my musings on why a hike might happen today;

  • Powell seems to be Yellen MKII, straight down the line, no interest in tipping any apple carts. So, perhaps this is an opportunity just to change things up and show that the Fed under his tenure is not about the same old same old
  • Part of the Fed’s mandate is stabilising prices. With Core CPI at 2.1% (it has not been lower than 1.6% since 2011), that’s pretty stable. The Core PCE is a bit different as the low over the same period since 2011 is 1.3%, and we’ve spent less time up near 2.0% but overall, again it’s looking stable. In this scenario the Fed is all about stable prices so it doesn’t matter if inflation doesn’t keep rising to 3% or something like that because it’s the longer-term view that matters. If it stays at 1.9%-2.1% for months, that’s still hikable.
  • Hiking today would be like making hay while the sun shines. Who knows what inflation will do next month? If the above is good enough now, it’s good enough to let the Fed bank more interest rate margin, which we all know is what they’re doing anyway.
  • Hiking today also gives them some breathing space for the rest of the year and doesn’t pre-commit them to hiking just at meetings with pressers. We’ve only three of those left so missing one would put pressure on the others. It gives them some possible room to ride out any unexpected bad news or dips in the economy or inflation. If they hike today it gives them five more meetings to hike once or twice more, rather than four meetings (if they hike in June instead)

All this is just might just be my mind wandering down Crazy St but it does serve a real purpose for my trading. My sensible head says “No hike today” but that little voice on my shoulder is saying “That’s fine but maybe just protect your trades in case it does happen”. And that’s the big point. None of the above might happen and we get a boring, uneventful FOMC but the risk to my account lies in if they do act, and that’s what I have to act on, be it adjusting or adding stops to protect myself for that ‘just in case’ moment. If nothing happens, fine, I re-adjust things back after and it’s business as usual.

We’re often fond of saying “never say never” when it comes to trading because even the most expected of expectations can be thrown onto the scrap heap. Take last year’s surprise BOC hike, that virtually everyone in our live trading room had planned for and made money on. It was planning for the unexpected that paid off.

The lesson here is feel free to call me crazy, to laugh off my idle thoughts if necessary but take a moment or two to check your trades and ask whether they can be damaged if the Fed do do something unexpected (and that can be either hawkish or dovish). If you find you might be at risk, plan how you can lower or protect against that risk, even if it’s just to ride out this event.

That concludes your crackpot analysis for today ?

Ryan Littlestone

Pin It on Pinterest