Fed's Reaction to Tariffs Pivotal

News travels fast and markets react just as quickly because access to the financial futures markets is virtually uninterrupted from Sunday night to Friday afternoon. In our Monday morning meeting we review event risk for the coming week. We examine scenarios depending on data that are bullish, bearish or neutral. There is an emphasis on economic reports that typically affect interest rate policy. Interest rates are the engine for the economy. The Fed raises interest rates to tame an overheated or inflated economy. And they lower rates to encourage spending and lending.

For years the monthly employment report was the main market mover. Recently, price components in many of the regular monthly reports are in vogue. Prices for goods and services are scrutinized more than job data lately. Producer and consumer prices are watched closely by the Fed. Unexpected acceleration in wage inflation would likely be bearish for both stocks and bonds. It has been this way since the February employment report showed hourly wages accelerating at a faster than anticipated pace. The equity indexes staged a steep decline on that information.

If you trade financial futures or correlating ETFs (bonds, stocks, precious metals and currencies), it is wise to be current with impact data. Ranking statistics in order of importance goes as such: prices (inflation), employment, sales and sentiment. But there is something new to consider in fundamental analysis.

The Federal Open Market Committee (FOMC) meets next week to decide interest rate policy. It is widely expected to raise the Fed funds rate 25 basis points (0.25%). Another rate hike is expected after the December meeting as well. This information has already been priced in the markets. If the Fed alters the path it has set, this should have a dramatic effect on the financial markets. What would change its mind?

Tariffs here and abroad are being applied, and it is unclear if they will help or hurt the American consumer. Next Wednesday, many traders will be paying special attention to rhetoric in the Fed’s statement. If the FOMC shows concern that taxes may be a drag on the economy, the Fed may slow or even stop raising rates. This would likely cause an increase in volatility, a rise in interest rate futures and a decline in stocks. If the Fed says nothing about the impact of tariffs, the current trends should extend.

Wednesday afternoon could teach us a lot about what concerns the Fed. The knee-jerk reaction after the statement could set the tone for weeks to follow.

John Seguin, Market Taker Mentoring

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