Next week’s Fed meeting could be important to gauge their thinking in the midst of various uncertainties – trade (tariffs) and the effect of the recent tax stimulus. Here are some things I’ll be looking for from the Fed, and some trades I am considering implementing.
- The statement should be a snoozer, with a hawkish bias from the better economic data. I think a hawkish tilt will be the baseline expected from the markets in the economic conditions section. I don’t expect a major change in the rest of the statement. The reason is because of the uncertainties around trade tariffs. When the Fed has been so non-committal in the past, deciding to take a side now (changing bias) or removing the forward guidance does not make sense. They can do that later in the year or whenever they have more clarity.
- The dots will be heavily-scrutinized. At the March meeting, we had 6 members for three 2018 hikes and 6 members for four hikes. Let’s ignore the riff-raff (2 dots below three hikes and 1 dot above four hikes). This 2018 tug-of-war could be interesting, and for me is probably the best indicator as to the hawkish/dovish leaning of the Fed, with strong growth, stable inflation and the specter of a prolonged trade dispute. The 2019 hikes will be interesting to me from the perspective of Kong (the EDZ8-Z9 buyer). The Fed thinks they will hike three times in 2019, and any change in the dots could affect Kong’s comfort level with his positioning. Finally, the long run dots will give us an indication of any changes in the neutral rate for the economy, and to what extent tens and bonds will remain in their recent trading ranges. I expect a small upward shift to all the dots, but nothing major.
- The press conference could help clarify a number of issues. In particular, I will be looking for any of the following:
- Trade tariffs as a risk to continued growth. This will help us calibrate the Fed pricing to future headlines. As mentioned previously, it is my opinion that the trade headlines will not get better for a few months (if at all). If a strong trade stance is favorably-viewed by voters, it’s possible Trump may decide to be less flexible, prolonging any trade stalemate.
- Forward guidance. There was quite a bit of discussion in the last Fed minutes on the removal/adjustment of the forward guidance parts of the statement. I think it’s a little premature to do anything now with respect to forward guidance, but Powell may clarify the Fed’s thinking.
- The IOER as a mechanism for controlling the FFER. One tail scenario could be any indication that an IOER adjustment may not be a one-and-done. You could see the Sept meeting get hit. Currently there seems to be too much priced in as an IOER impact.
- Press conferences at non-quarterly meetings. I still see this as being unlikely, as there is no need for more than 4 hikes this year, and Powell is a man of few words. But this was a topic that the Fed was going to consider more around now.
- Reducing the Fed’s mortgage portfolio. At some point, the Fed is going to have to accelerate its unwind of mortgages to remove it from the balance sheet. It’ll be interesting to see if they will make any adjustments to the roll-off later this year.
The above results in some trades I’ll be looking to do after the Fed meeting (depending on how the meeting transpires).