The Federal Reserve’s policy decision Wednesday is being eagerly anticipated by investors looking for further details about what the pivot to patience on rates means, how the new “ dot plot” will look and how policy makers will approach inflation-targeting and balance-sheet runoff.
While there’s a lot of uncertainty surrounding these issues, markets are optimistic as shown by a rally in stocks and cross-asset volatility near historic lows. There’s a feeling in markets that policy clarity is improving not just at the Fed, but also at central banks in Europe, Japan and China.
Having said that, there are a number of possible wild cards that may be come out of the Fed decision, due 2 p.m. Wednesday in Washington. Here are some thoughts from analysts and strategists on how to navigate markets through the Fed announcement.
UBS AG ( Stuart Kaiser et al.) - New York
The euro has larger average and absolute moves -- 0.9 percent and +/- 1.2 percent, respectively -- than assets like the S&P 500 or 10-year Treasury yields when dots are lowered, strategists led by Kaiser wrote in a note Monday. The yen has also responded to lower dots, but to a lesser extent, they said.
“FX moves suggest a global risk-on dynamic, so low FX implied volatility offers attractive optionality for the FOMC,” UBS said.
Most of the impact on stocks from the Fed meeting will come before the announcement, they said. The S&P 500 has moved +/- 0.6 percent on days of Federal Open Market Committee statements since 2012.
However, on the five occasions dots were lowered, the gauge rallied an average 1.8 percent in the week before the meeting, “suggesting the moves were well-telegraphed,” the strategists wrote. S&P 500 returns were negative on average in the following week, he said.
Goldman Sachs ( Zach Pandl, Ian Wright) - New York/London
Goldman is looking for confirmation that the FOMC’s move away from trying to tighten financial conditions will last for some time, which is one of the key points in the company’s medium-term bearish U.S. dollar view, strategists led by Pandl wrote March 15.