Don't Expect Markets To Care One Bit About This Week's Fed Meeting

| About: iPath S&P (VXX)

Summary

It is becoming increasingly clear that markets have lost faith in what the Federal Reserve says.

This shows both in realized volatility after Fed statements, as well as through such measures as the VIX.

In this article, I go over how the Federal Reserve lost its credibility and why you shouldn't expect much from this month's meeting.

The VIX volatility index (NYSEARCA:VXX), which measures expected future volatility, remains abnormally low despite the upcoming meeting. Equity traders don't expect the FOMC meeting to move markets much. Just on this indicator alone, it is clear that the Fed is losing credibility among investors.

It really all started in December of last year, after the FOMC decided to raise rates for the first time in almost a decade. The statement released after that historic meeting took an optimistic tone to 2016 economic growth, saying four further rate hikes could be expected during the year. Importantly, the final decisions would be "data dependent."

Almost immediately after the calendar turned over, equity markets began to fall fast and hard. By the end of January, the S&P 500 had fallen more than 10%. Market commentary was bleak. "Recession" became an increasingly common word.

Suddenly, the FOMC was hugely off-kilter with markets. These same markets had become a powder keg after years of post-financial crisis stimulus had bloated asset prices; it appeared that now the fuse had finally been lit. Fearing what may be in store, the Fed chose, maybe correctly, to throw its support behind the market.

So, they began to talk down the idea of 2016 rate hikes. Whereas just a month ago the fed funds rate was looking to about double during 2016, chances were now looking better for only three or even two hikes. All of this despite continued data showing that the overall economy was just as strong as at the end of 2015.

It was clear that the Fed was simply trying to calm the markets, and their credibility began to take a hit. As the months went on, it became clearer that they were not nearly as data dependent as they had indicated. While economic indicators remained steady, Fed rate hike projections continued to fall. As there statements moved further from their actions, people began to stop listening.

Fast forward to today. The FOMC has used every hiccup throughout the year to delay the next hike, and we're all still waiting. With uncertainty around the recent UK vote, forecasts have plummeted to a less than 50%, as told by fed funds futures, that we will even have a single hike this year.

The FOMC obviously has a serious crisis of confidence in what they are telling the public, and signs are continuing to mount that the public is increasingly just tuning them out. Practically each month since the start of the year, the monthly FOMC meeting has garnered less market volatility than the one before.

Now, even though the FOMC is set to begin July's meeting Tuesday morning (which should probably be read as "today" for most of you), signs are pointing to markets expecting less volatility than even your average trading day. At the time of writing, the VIX is just above 13, below the historical mean. This is despite the strong, clean rally that the S&P 500 looks to be concluding. Still, markets aren't expecting a pullback or even uncertainty in the days to come.

So this is my warning to you, this FOMC meeting will not have a normal effect on markets. It is unlikely that the VIX will fall at its conclusion, a profitable opportunity after most meetings. Currency markets probably won't see nearly the volatility typical of these meetings, equity markets won't thrash at the meeting's conclusion, and fixed income markets may be almost as calm as ever.

Disclosure: I am/we are long S&P 500.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.