Today's FOMC Meeting: Extended Life Support for Markets?

Includes: DIA, IVV, SPY
by: Band of Analysts

The policy-making arm of the Federal Reserve, the Federal Open Market Committee (FOMC), started its regular two-day meeting yesterday and will publish the minutes from the meeting today at 2:15 PM. Nobody is expecting any mention about increasing interest rates, since it is quite obvious that it is too early for that, given the weak state of the economy. The focus is going to be on any change in the language that will indicate whether the government will be withdrawing its support sooner or later.

"Sooner" would be bad for the market, leading to a stronger dollar and weaker stock market levels. The dollar would strengthen because support withdrawal means less printing of dollars, so lower supply of dollars in the market. The stronger dollar will hurt US exports, because they will become more expensive and their demand from abroad will thus decline. However, given continued increases in the unemployment rates and anemic credit demand, both of which indicate that the economy is anything but on a firm footing, it is more likely that the FOMC will not hint towards an end of the accommodative monetary policy.

In fact, there are rumors of a second stimulus plan that have been gaining credence the past few days. Such an announcement would send the dollar lower and equities higher, potentially triggering a short-term rally. If equities spike and investors become more confident that the government will keep the liquidity in the system -- which inflates asset prices all-around and makes it less risky to invest, at least in the short term -- investors that have been positioning their portfolios defensively on the off-chance that the FOMC will lay out a clearer plan of support withdrawal will have to rush back into the market.

After last week's mini-correction, the market has not been making any bets ahead of the FOMC announcement, which is why it fluctuates. The initial morning reaction -- lower dollar and higher futures -- is an early indication that investors are getting more bullish from current levels. Mutual funds closed out of a lot of positions the past week as their fiscal year ended, and the momentum caused many hedge funds to follow suit. This means that they are probably under-invested, so any positive news can have a large impact. The risk-reward seems to be more favorable to the upside. Ultimately though, the inflection point in the market will happen at 2:15 and no big bets will take place until then.

About this article:

Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here