The US Federal Reserve will hold a meeting on Wednesday. The announcement of the interest rate decision and FOMC member forecasts will be accompanied by Jerome Powell’s press conference. The upcoming event is already having a big impact on equities, the USD, and other markets.
Why is it important?
US economic performance deteriorated in Q1 and the central bank may acknowledge that. The Federal Reserve is to update its economic forecasts. The new outlook will likely include fewer rate hikes (one or none) as well as projections of slower economic growth. Economists also expect the regulator to end its program of reducing the balance sheet, although there are different opinions on when this might happen.
With central banks around the world pulling away from policy tightening, the market’s risk sentiment improves and the demand for riskier assets (i.e. stocks, higher-yielding currencies) goes up.
Companies don’t like higher borrowing costs, so the pause in the Fed’s hiking cycle seems like a good thing.
S&P 500 is on its way to show the best quarter since Q3 of 2009. The index is up by 13% since the start of the year. At the same time, investors should view the situation with some degree of cautiousness. If the trend of the weakening global growth gathers pace, stocks may start feeling the negative pressure. For instance, US GDP growth cooled from 3.4% in Q3 to 2.6% in Q4. Further deterioration will hurt companies’ earnings and thus put a stop on stocks’ advance.
It’s necessary to understand that the market’s expectations ahead of the Federal Reserve’s meeting are very pronounced: traders think that the Fed will sound cautious and underline that it’s in no hurry to raise interest rates. Notice that the stock market has been actively gaining ahead of the event and the Fed officials have already made a lot of dovish statements. As a result, we face the risk of ‘buy the rumor, sell the fact’ scenario.
Last week the index took off from the 50-week MA in the 2,745 area (it’s a support level now) and went past resistance at 2,825 climbing to a 5-month high on Monday. January highs at 2,880 are now in focus.