The Federal Reserve will release their policy statement tomorrow at 2PM ET. The big question is, what will they say and how will the markets react? Over the last few days, the markets have rallied higher on hopes that the Federal Reserve will take a more dovish position on cutting quantitative easing. Below are the various options and how the markets will react.
1. The Federal Reserve will cut another $10 billion from their quantitative easing program which currently sits at $55 billion a month. The Federal Reserve will strengthen their language about cutting back on their print money policies and discuss raising interest rates in one year. This was briefly mentioned by Janet Yellen over a month ago and the markets sold sharply. Should this scenario happen, expect the markets to sell hard.
2. The Federal Reserve will cut another $10 billion from their quantitative easing program, which currently sits at $55 billion a month. Their verbage will stay the same with medium dovish chatter. The markets would see neutral to minor selling if this is the result, essentially, negating the buying pressure seen over the last few days.
3. The Federal Reserve will cut another $10 billion from their quantitative easing program which currently sits at $55 billion a month. Their statement will contain new dovish language which will show they are willing to bail the market out if any new issues arise. The market would love this option and rally higher.
4. The Federal Reserve cuts less than $10 billion from their quantitative easing program which currently sits at $55 billion a month. This would shock the markets. Additionally, they make very dovish comments. This would initially spike the markets sharply higher but then leading to selling. Questions would be raised on how strong the economy really is and whether or not the Federal Reserve knows something the rest of the market does not.
5. The Federal Reserve does not cut another $10 billion, instead leaving their printing presses producing $55 billion a month. Their language becomes super dovish. This would initially spike the markets but then send the markets into a panic mode on fear about a new recession.
Overall, the likely scenario is number two or three. The Federal Reserve will likely continue to cut back on quantitative easing at a $10 billion per meeting clip. Lately, the economic reports are showing slight growth and no change from any other recent meeting. Is it possible they say a few more dovish comments? Sure. Considering the issues with Russia and China it is possible. Either way, the most likely reaction would be a small sell off or small rally on their statement.