If you’re a regular reader of this blog, you know I am endlessly frustrated by the on-going game “Predict the Fed’s Movements.” Why traders and investors insist on playing annoys me to no end. The Fed doesn’t hide its intentions. In fact, when there’s a change in Fed monetary policy, you’ll know.
Why the obsession with the Fed?
In a word: liquidity. Strong liquidity is good for the stock market and signals aggressive stock buying. (The opposite holds true when there is a choke hold on liquidity.)
As we all know, the job market and economy are improving as we see the light at the end of the pandemic-tunnel. The Fed provided enough stimulus to get the economy back on track, so now it appears a clock is ticking on the current (generous) Fed monetary policy. At least, that’s what people are saying.
However, Fed Chair Jerome Powell didn’t say a word about an easing of the stimulus last week. Instead, he emphatically stated there won’t be any change in policy for the foreseeable future. In addition, he said that when a change is coming, everyone will have significant notice.
Did that stop the guessing? Apparently not, as the Fed Funds Futures market is active once again (it had been dormant for over a year).
A change in Fed monetary policy is coming … eventually
When the Fed launched its generous monetary stimulus last year in response to the pandemic, it triggered a worldwide flood of liquidity into markets. This lead to worries about rampant inflation, which usually triggers a rush of money into gold. We’re not seeing that right now, but other commodities are spiking on strong demand as the supply of stocks remains low. The Fed is definitely watching this; their goal is to keep inflation low and employment high.
Inflation worries aside, if the Fed sees more positive economic data, they will have no choice but to shift gears. Last week, Robert Kaplan, the Fed Governor from Dallas, suggested we’ll see a tapering of bond purchases before 2021 is over. If that should happen (highly unlikely before December), markets are likely to shake hard.