Global financial markets will react with volatility if the Federal Reserve unveils any surprises today, affirms a leading analyst at one of the world’s leading financial advisory organisations.
Tom Elliott, deVere Group’s International Investment Strategist, is commenting ahead of the first Fed policy meeting under the new Chair, Jay Powell, at which the central bank is expected to raise interest rates. The previous hike was in December 2017.
Mr Elliott observes: “Jay Powell is almost certain to announce a rate hike today of 25bp, taking the Fed Fund’s target rate from its current 1.25 per cent to 1.5 per cent up to a new range of 1.5 per cent to 1.75 per cent.
“Markets will not respond to the hike per se, since it has been widely anticipated. But they will respond to any surprises in the accompanying statement, which suggest a deviation from the expected three further rate hikes this year.”
He continues: “A cautious statement, that perhaps emphasises how moderate wage growth and inflation suggest further capacity in the economy for non-inflationary growth, will take pressure off bonds – yields will fall as prices rise – and support equities. Global bonds and stock markets will follow the U.S. markets in the rally. Growth-orientated stocks and sectors, and those with leverage, will outperform.
“But a statement that emphasises the inflationary risks of Trump’s tax cuts and raised import tariffs, and perhaps a comment of the need to pre-empt inflationary pressures through accelerated monetary tightening, will spook investors.
“A fourth rate hike this year will become priced into the markets, disruptive for bonds in particular but also for equities as a more aggressive Fed will have a negative impact on corporate profits. Financials will benefit from wider interest rate spreads, as will more defensive parts of the stock market.”
Mr Elliott goes on to say: “Investors will also be looking for word on the Fed’s quantitative easing (QE) program.
“The sheer size of the program makes its unwinding potentially hazardous for financial markets. Will the Fed continue to unwind the program by $10bn a month, taking the Fed’s balance sheet slowly down from its a peak of $4.5 trillion, to Powell’s stated aim of $2.5 tr to $3 trin four years? Or will it accelerate the unwinding, if Powell decides to use the unwinding of QE as an active policy tool by which to take liquidity out of the economy?
“He could, for instance, start actively selling bonds in the market in addition to not replacing expiring bonds. Since this will coincide with the Treasury issuing ever-more bonds to finance the widening budget deficit, an over-supply of Treasuries may disrupt financial markets.”
The Federal Reserve announcement is scheduled for 2 p.m. ET.