Here's Why Tomorrow's FOMC Meeting Is So Critical
Tiho Brkan | Oct 28, 2014 06:57AM ET
In a recent article on the Financial Sense website, Chris Puplava put forward various quotes by central bankers expressing their view that ending stimulus right now could be slightly premature. Various dovish comments are most likely attributable to the rebound in the stock markets from oversold conditions back in the middle of October. Let's focus on one of these comments below, by the Fed’s Bullard:
Inflation expectations are declining in the U.S. …that’s an important consideration for a central bank. And for that reason I think that a logical policy response at this juncture may be to delay the end of the QE…
“We are watching and we’re ready and we are willing to do things to defend our inflation target,” Bullard said… A pause in tapering would protect against “downside risk” and bolster inflation expectations, he said. “We could react with more QE if we wanted to.”
Personally, I believe the up-and-coming FOMC meeting is one of the more important ones and worth paying attention to. The question is whether the Federal Reserve will extend QE for a while longer or stop it this month as originally planned. This decision will impact the movement of equities, bonds, currencies and commodities.
h3 Chart 1: Falling inflation expectations will have the Fed worried /h3It is Mr Bullard’s comments that have me paying close attention to the bond market right now. I am looking at the same indicator the Fed tracks, namely the 5 Year Forward Inflation Expectation Rate. As a matter of fact, if you look at Chart 2, below, you will notice that every time inflation expectations fell to a level such as the one we are currently at (or even lower), the Federal Reserve was not talking about ending stimulus, but actually hinting at starting or extending it.
During the Jackson Hole meeting in August 2010, ex-chairman Bernanke hinted at QE 2. During the US Debt Ceiling Debate, various risky assets went through a major correction, causing the Fed to be concerned once again about deflation. As a result, Operation Twist was started around that time.
By the middle of 2012, various FOMC members and other central bankers started to hint at the possibility of a new round of QE, which was eventually implemented during November 2012. By the middle of 2013, various assets—and in particular Emerging Markets—were affected by the talk of QE taper. Eventually, ex-chairman Bernanke pushed the taper out to year end.
Get The News You Want
Today, inflation expectations are once again very low, so I ask myself, 'is it wise to expect the Fed to end QE this month, as the majority expects'? Obviously, that is a hard one to answer and I wish my crystal ball could help me here, (but its broken). So, as always, I'll refer to the market rather than the opinions of various analysts, economists, strategists and other experts. Let's look at the way investors are positioned for better clues.
h3 Chart 2: If the Fed resumes QE, heavily shorted assets could benefit… /h3In my recent post entitled Currency Market Positioning, I discussed the fact that market participants hold a huge net long exposure in the US dollar. Every man and his dog is bullish the greenback right now, as am I. All of my cash has been held in US Dollars for months now, while I have been heavily short Gold and Silver since the July peaks.
From my own experience, it rarely pays to be on the side of consensus, so there is an above average probability that these trades could reverse and rebound (for at least a while). Obviously, what is needed is some sort of catalyst. So I wonder if the recent stock market volatility, as well as the fall in inflation expectations, has scared the FOMC enough to extend QE.
If this was to happen, we could see a shake out of the Dollar bulls and a fast short squeeze of the bears on various assets such as the Australian dollar, Crude Oil and even Silver (refer to Chart 3). With a tight stop loss below $17 per ounce. A contrarian trader could bet on a PMs rebound right now. The trade would have very minimal risk at the current price level.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.