This Is What You Should Expect From The FOMC

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What Should We Expect from the FOMC? Not Much.

Investors will be left disappointed — and left to deal with all the other issues that have been bothering them lately

All eyes are on yet another “most important ever” Federal Open Market Committee (FOMC) policy meeting. On Wednesday afternoon, policymakers will release their announcement (no hike expected), Federal Reserve Chairwoman Janet Yellen will hold her press conference (many words will be spoken, but little will be said), and economic and interest rate estimates will be updated.

Of all these developments, the latter will be the most consequential.

Currently, the futures market doesn’t believe the Fed will raise interest rates at all this year: December rate hike odds are at only 40%. But the Fed’s last forecast in March pointed to two rate hikes this year. Since then, steady labor market tightening has driven a majority of Fed policymakers to warn the market was being too pessimistic on the chances of two, three or even four rate hikes this year.

This difference of opinion will need to be reconciled. Whether stocks rise or fall on Wednesday will depend, in large part, on whether the FOMC meeting results in the Fed sticking to its guns on this or once again deferring to Wall Street … at the risk of further eroding its already thin credibility as being dependent on the economic data.

The stakes are high.

The Dow Jones Industrial Average has traded back below its 50-day moving average. We face the specter of a first-ever departure from the European Union, a massively contentious U.S. presidential election, crude oil back under $50 and U.S. 10-year yields back at 2020 lows.

German 10-year bunds traded with a negative yield for the first time ever on Wednesday. According to Fitch, the volume of global government bonds trading with negative yield has crossed the $10 trillion mark for the first time — representing about 20% of total. Precious metals have been soaring on safe-haven inflows.

Worries that the Federal Reserve will be pushed to raise rates in July or September is exacerbating this dynamic — on concerns this would be a policy mistake.

Yellen is sure to mention these concerns in her post-FOMC press conference today amid evidence of ongoing labor market tightening and building evidence of wage inflation. Yellen must walk a thin line between expressing confidence in the economy but not shocking liquidity-addicted markets. As time goes on, this becomes harder and harder to do.

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Just look at Wednesday’s retail sales report: Headline sales rose 0.5% in May over April, beating consensus estimates, thanks to a solid rise in core sales (excluding autos, gasoline, food, and building materials). Overall, the Atlanta Fed’s GDPNow estimate of second quarter growth stands at 2.8% (vs. 2.5% previously).

For all these reasons, don’t expect anything new from Yellen and her cohorts: They’ll most likely mention downside risks, recent highlights in the economic data, and continue to pencil in two rate hikes.

With the Federal Reserve unlikely to do anything significant, stocks are likely to be disappointed since investors will be left with all the issues that have been bothering them lately spiked by the realization that the Fed could be turning hawkish.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.

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What to Expect From Yellen and the FOMC This Week

This week’s Federal Open Market Committee (FOMC) meeting will be a two-day meeting that begins on Tuesday. What some investors are bracing for now is what, if any, changes will be made to the exit of quantitative easing. What appears to be the norm is that no economists are looking for any formal rate hike. The International Monetary Fund (IMF) warning that the United States needs to exit its low-rate environment is of no influence here.

One expectation is that another $10 billion in monthly bond buying will be tapered by the Federal Reserve. If history is a gauge, it will be $5 billion trimmed in monthly Treasury purchases and another $5 billion trimmed in monthly purchases of mortgage backed securities.

Another expectation is that the Federal Reserve will release its quarterly forecasts at the same time that it releases its statement. If gross domestic product (GDP) trends are static, then it is safe to assume that the forecast for GDP growth in 2020 will be lowered slightly.

In fact, the CME Fed Fund Futures is not signaling a 100% certainty that the Fed Funds rate will move from its near-zero benchmark now up to 0.25% until May of 2020. It is not until September of 2020 that the Fed Funds futures sees the Fed Funds rate projecting a certainty of 0.50%.

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Busy week from the U.S. FOMC, Payrolls report.

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The week ahead will be busy for the U.S. dollar.

The economic events over the week include the FOMC meeting during the week.

The markets expect to see no changes to interest rates at this week’s meeting.

However investors are likely to be clued into the Fed’s statement that could offer insights into the Fed’s forward guidance.

The FOMC meeting will not be followed up by a press conference.

The expectation for a rate hike at this month’s meeting is also low.

The Fed officials are expected to signal whether the next rate hike will happen at the June FOMC meeting.

In this basis, the Fed’s forward guidance will be a key factor for the markets.

Other economic data from the U.S. this week will include the ISM’s manufacturing PMI data.

Forecasts point to a 58.5 print on the index. This marks a slower print compared to 59.3 previously.

The core PCE data is also expected over the week. The payrolls report due on Friday.

Expectations are for a 4.0% decline on the U.S. unemployment and the number of jobs added during the month is expected to show an increase of 185k during the month.

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