If you read this blog regularly, you know that the ongoing game, Predict the Fed Movements, frustrates me immensely. Why traders and investors insist on gambling annoys me to no end. The Fed does not hide its intentions. Indeed, if the Fed’s monetary policy changes, you will know.
Why the obsession with the Fed?
In a word: liquidity. Strong liquidity is good for the stock market and signals an aggressive stock buying. (The opposite is true when liquidity is stifled.)
As we all know, when we see the light at the end of the pandemic tunnel, the labor market and the economy improve. The Fed has given enough impetus to get the economy going again. Now it seems like a clock is ticking on the current (generous) monetary policy of the Fed. At least that’s what people say.
Fed Chairman Jerome Powell didn’t say a word about easing the stimulus last week, however. Instead, he insisted that there would be no policy change for the foreseeable future. Additionally, he said that when a change comes, everyone will have a significant notification.
Did that stop the guessing? Apparently not, as the Fed Funds futures market is back in operation (it has been inactive for over a year).
A change in Fed monetary policy will come … at some point
When the Fed launched its generous monetary stimulus in response to the pandemic last year, it sparked a global flood of liquidity in the markets. This led to concerns about rampant inflation, which usually spark a money rush in gold. We don’t see this right now, but there is strong demand for other commodities 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, the Fed will have no choice but to switch gears when it sees more positive economic data. Last week, Dallas Fed governor Robert Kaplan suggested reducing bond purchases before 2021. Should this happen (highly unlikely before December) the markets are likely to shake badly.